Estimation of Weighted Average Cost of Capital Question Answer 2022

Ques-1
Estimation of Weighted Average Cost of
Capital
Particulars Amount Rate of
interest
(Annual)
WACC
(Refer
note -4
for
formula)
Remarks
Additional loan 2,000,000 3.2188% 0.1543% Refer note -2
Preference shares 6,600,000 6.5000% 1.0282%
required rate of return on
preference share
Bonds 9,375,000 3.6470% 0.8194% Refer note-3
Equity 23,750,000 8.6700% 4.9350% Refer Note-1
Total capital
employed 41,725,000 6.9369%
Note -1
Computation Cost of equity
Price of share = Dividend/(1-Ke)
Where
Dividend = Next dividend expected to be paid
by the company
Ke= Cost of equity
2.25
=0.25*(1.02)
/1-ke
Ke= 0.886666667
Note-2
Rate of interest
(forntightly 4.50%
Unrestricted

compounding)
Effective interest
rate
r=(1+i/n)^n-1
I = 4.5%
n = 24 (approx.)
n-1 = 23
i/n= 4.5%/24
r = 4.5984%
Effective cost of
loan
=rate of interest * (1-tax
rate)
=
4.5984*(1-.3)
3.21888
Note-3
Cost of bonds 5.21%
Effective cost of
bonds
=Cost of bonds* (1-tax
rate)
= 5.21%*(1-
0.30)
3.65%
Note-4
WACC = Cost of debt * porportion of debt in
total capital +
Cost of pref share * proportion of pref share in
total capital +
Cost of bonds*proportion of bonds in
totalcapital+
Unrestricted

Cost of equity*proportion of equity in
total capital
Ques-2
NPV analysis
Option 1 (i): Replace old machine with
EcoSleek Model
Year-0 Year-1 Year-2 Year-3 Ye
Cost of equipment (2,250,000)
Installation (250,000)
Net incremental working capital (350,000)
Sales 16,800,000 18,816,000 21,073,920 23,60
Profit on sale 0 0 0 450,0
Loss on sale of old machinery (150,000) 0 0 -
Raw material cost
(10,080,00
0)
(11,854,08
0)
(13,276,57
0)
(14,8
8)
Training cost (125,000) - - -
Maintenance (300,000) (300,000) (300,000) (300,
Other operating expenses (900,000) (945,000) (992,250) (1,04
Depreciation (625,000) (625,000) (625,000) (625,
Profits for the year 4,620,000 5,091,920 5,880,100 7,216
Less: Tax @ 30% (1,386,000) (1,527,576) (1,764,030) (2,16
Profit after tax 3,234,000 3,564,344 4,116,070 5,051
Add: Depreciation 625,000 625,000 625,000 625,0
Unrestricted