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 Fall 2010_MGT201_2_SOL |
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| Assignment # 02 Marks: 20
“Weighted Average Cost of Capital and Leverage”
Question # 01
XYZ Enterprises is interested in measuring its overall cost of capital. Current
investigation has collected the following data.
Debentures: Firm’s Debentures can be sold at an interest rate of 13%.
Preferred stock: Firm can sell 9% preferred stock at its par value of Rs.100 pershare.
The cost of issuing and selling the preferred stock is expected to be Rs.10
per share.
Common stock: The firm’s common stock is currently selling for Rs.80 per
share. The firm expects to pay cash dividends of Rs.9 per share next year. The
firm’s dividends have been growing at annual rate of 5% and this is expected to
continue in future. Floatation costs are expected to amount Rs.5 per share.
The firm is in 35% tax bracket.
i. Calculate the specific cost of each source of financing
ii. Calculate the weighted average cost of capital?
Question # 02
Given the price and cost data shown in the following table of each of the two
firms A and B, answer the following questions.
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