LT India Ltd has the following capital structure, which it considers optimal:
Equity shares 65%
Applicable tax rate for the company is 25%. Risk free rate of return is 6%, average equity
market investment has expected rate of return of 12%. The company’s beta is 1.10. Debt
will bear an interest rate of 9% p.a.
a. component cost of debt and equity shares assuming that the company does not issue
any additional equity shares.
b.Weighted Average Cost of Capital (WACC).
a. Component cost of debt and equity shares assuming that the company does not issue any additional equity shares are:
Cost of debt is 9%.
Cost of equity is:
"Ke = 0.06 + 1.1*(0.12 - 0.06) = 0.126."
b. Weighted Average Cost of Capital (WACC) is:
"WACC = 0.35*(1 - 0.25)*0.09 + 0.65*0.126 = 0.1055."
Thank you so much !! You are an angel !!