Mega Company has the following capital structure, which it considers to be optimal: Debt 30% Preferred stock 20 Common equity 50 100% Mega's current…
BBS Fundamentals of Financial Management · 2078 · Solved Question with Answer
Mega Company has the following capital structure, which it considers to be optimal:
| Debt | 30% |
| Preferred stock | 20 |
| Common equity | 50 |
| 100% |
Mega's current dividend per share is Rs 15. Investors expect future earnings and dividends to grow at a constant rate of 6 percent per year forever. The company's stock currently sells for Rs 180 per share. New common stock can be sold for Rs 150 per share. Preferred stock can be sold with a dividend of Rs 12 to the public at a price of Rs 90 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 40 percent.
a. Calculate the cost of each capital component.
b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from retained earning only.