CA Inter P6 · Chapter 4 · Question 7 of 10
The capital structure of Dhruv Ltd (book values) is: equity share capital ₹ 30 lakh (cost 15%), 12% preference share capital ₹ 10 lakh and 10% debentures ₹ 40 lakh. The tax rate is 30%. The weighted average cost of capital on book value weights is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 10.625%
Explanation
Post-tax cost of debt = 10% x (1 - 0.30) = 7%. Preference capital costs 12% with no tax adjustment. WACC = (30 x 15 + 10 x 12 + 40 x 7) / 80 = (450 + 120 + 280) / 80 = 850 / 80 = 10.625%. Using pre-tax debt gives 12.125%, and applying a tax shield to preference dividend gives 10.175%.
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