Question

18. (Weighted cost of Capital) The capital structure for the Carrion Corporation is provided below. The company plans to maintain its debt structure in the future. The firm has a 7.00 percent cost of debt, a 15 percent cost of preferred stock, 6.5 percent cost of common stock, what is the firm's weighted cost of capital? Capital structure (Rs000) Debt Preferred stock Common stock (4, 50,000 @ Rs. 10) Rs. 7,000 3500 4,500

Answer 1

Weighted Cost of Capital : It is the rate that the company has to pay to the providers of the capital to finance the assets of the Company. It is also called as the Company's cost of capital.

Weighted Cost of Capital = We x Ke + Wp x Kp + Wd x Kd(1-t),

where, We = percentage of equity in capital structure,

Wp = percentage of preference share in capital structure

Wd = percentage of debt in capital structure

Ke = Cost of Equity

Kp = Cost of Preference Shares

Kd = Cost of Debt