Sahara Company has the following capital structure, which it considers to be optimal: Debt 40% Preferred stock 10 Common equity 50 100 % Sahara's…
BBS Fundamentals of Financial Management · 2080 · Solved Question with Answer
Sahara Company has the following capital structure, which it considers to be optimal:
| Debt | 40% |
| Preferred stock | 10 |
| Common equity | 50 |
| 100 % |
Sahara's current dividend per share is Rs 30. Investors expect future earnings and dividends to grow at a constant rate of 5 percent per year forever. The company's stock currently sells for Rs 280 per share. New common stock can be sold for Rs 250 per share. Preferred stock can be sold with a dividend of Rs 14 to yield at a price of Rs 95 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 30 percent.
a. Calculate the cost of each capital component.
b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from external equity only.
c. What are the uses of cost of capital?