Given below is information on the capital structure of three companies on 31-12-2023. All figures in thousands of Rs. Table Company X Company Y Company Z Paid Up Ordinary Share Capital 125,000 80,000 260,000 Capital Reserves 15,000 0 120,000 Retai

To calculate the cost of equity, cost of debt, and the weighted average cost of capital (WACC) for each company, we need to use some formulas and the given data. Let's go through each company step by step. **i. Cost of Equity:** The cost of equity can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model): \[ \text{Cost of Equity} (r_e) = \frac{D_1}{P_0} + g \] Where: - \(D_1\) = Expected dividend per share next year - \(P_0\) = Current market price per share - \(g\) = Growth rate of dividends **For Company X:** - Current Market Price per Share (\(P_0\)) = 15 - Dividend Rate = 15% of Paid Up Capital - Calculate expected dividend: \[ \text{Total Dividend} = \text{Ordinary Share Capital} \times \text{Dividend Rate} = 125,000 \times 15\% = 18,750 \] - Dividends per share = Total Dividend / Number of Shares = 18,750 / (125,000/15) = 2.25 - Expected dividend next year \(D_1 = 2.25 \times (1 + 0.10) = 2.475\) (10% growth) \[ r_e = \frac{2.475}{15} + 0.10 = 0.165 or 16.5\% \] **For Company Y:** - Current Market Price per Share (\(P_0\)) = 45 - Dividend Rate = 30% of Paid Up Capital - Calculate expected dividend: \[ \text{Total Dividend} = 80,000 \times 30\% = 24,000 \] - Dividends per share = 24,000 / (80,000/45) = 13.5 - Expected dividend next year \(D_1 = 13.5 \times (1 + 0.05) = 14.175\) (5% growth) \[ r_e = \frac{14.175}{45} + 0.05 = 0.274 or 27.4\% \] **For Company Z:** - Current Market Price per Share (\(P_0\)) = 12 - Dividend Rate = 16% of Paid Up Capital - Calculate expected dividend: \[ \text{Total Dividend} = 260,000 \times 16\% = 41,600 \] - Dividends per share = 41,600 / (260,000/12) = 1.92 - Expected dividend next year \(D_1 = 1.92 \times (1 + 0.04) = 1.9968\) (4% growth) \[ r_e = \frac{1.9968}{12} + 0.04 = 0.1664 or 16.64\% \] **ii. Cost of Debt:** The cost of debt can be calculated as: \[ \text{Cost of Debt} (r_d) = \text{Coupon Rate} \times (1 - \text{Tax Rate}) \] **For Company X:** - Cost of Debt = 11% (Coupon Rate) * (1 - 0.35) = 0.11 * 0.65 = 0.0715 or 7.15% **For Company Y:** - Cost of Debt = 11% (Coupon Rate) * (1 - 0.34) = 0.11 * 0.66 = 0.0726 or 7.26% **For Company Z:** - There is no debt for Company Z, so Cost of Debt is 0%. **iii. Weighted Average Cost of Capital (WACC):** WACC is calculated using the formula: \[ WACC = \left(\frac{E}{V} \times r_e\right) + \left(\frac{D}{V} \times r_d\right) \] Where: - \(E\) = market value of equity - \(D\) = market value of debt - \(V\) = total market value (E + D) **Market value of equity:** - **Company X: E = 125,000 shares * 15 = 1,875,000** - **Company Y: E = 80,000 shares * 45 = 3,600,000** - **Company Z: E = 260,000 shares * 12 = 3,120,000** **Market value of debt:** - **Company X: D = 85,000 (bonds) = 85,000** - **Company Y: D = 20,000 (bonds) + 20,000 (preference) + 300,000 (preference) = 340,000** - **Company Z: D = 0** Total values: - **Company X: V = 1,875,000 + 85,000 = 1,960,000** - **Company Y: V = 3,600,000 + 340,000 = 3,940,000** - **Company Z: V = 3,120,000** **WACC Calculation:** **For Company X:** \[ WACC = \left(\frac{1,875,000}{1,960,000} \times 0.165\right) + \left(\frac{85,000}{1,960,000} \times 0.0715\right) = 0.173 or 17.3\% \] **For Company Y:** \[ WACC = \left(\frac{3,600,000}{3,940,000} \times 0.274\right) + \left(\frac{340,000}{3,940,000} \times 0.0726\right) = 0.263 or 26.3\% \] **For Company Z:** \[ WACC = \left(\frac{3,120,000}{3,120,000} \times 0.1664\right) + \left(0 \times 0\right) = 0.1664 or 16.64\% \] ### Summary of Results - **Company X:** - Cost of Equity: 16.5% - Cost of Debt: 7.15% - WACC: 17.3% - **Company Y:** - Cost of Equity: 27.4% - Cost of Debt: 7.26% - WACC: 26.3% - **Company Z:** - Cost of Equity: 16.64% - Cost of Debt: 0% - WACC: 16.64%