Shalimar Paints has the following capital structure which it considers to be optimal. Debt 30% Preferred stock 15% Common stock 55% The company's tax…
2026 · Solved Question with Answer
Shalimar Paints has the following capital structure which it considers to be optimal.
| Debt | 30% |
| Preferred stock | 15% |
| Common stock | 55% |
The company's tax rate is 30 percent, and the investor expected earnings and dividends to grow at a constant rate of 4 percent in the future. The company paid a dividend of Rs 20 per share last year, and its stock currently sells at a price of Rs 208 per share. These terms would apply to new security offerings.
New common stock would have a floatation cost of 5 percent.
New preferred stock could be sold at a price of Rs 100 per share with a dividend of Rs 9. Floatation cost of Rs 6 per share would be incurred.
Debt could be sold at an annual interest rate of 10 percent.
a. Find the component cost of debt, preferred stock, retained earnings, and new common stock.
b. Calculate the WACC assuming common stock financing requirements are all met by retained earnings.