The following table gives structure of Gandaki Cement Company: Debt Rs. 80 Million Common equity Rs. 120 Million Total liabilities and equity Rs. 200…
BBS Fundamentals of Financial Management · 2077 · Solved Question with Answer
The following table gives structure of Gandaki Cement Company:
| Debt | Rs. 80 Million |
| Common equity | Rs. 120 Million |
| Total liabilities and equity | Rs. 200 Million |
Current interest rate on new debt is 10 percent. The firm's marginal tax rate is 30 percent. Gandaki Cement Company has just paid dividend Rs 30 per share. Dividend is expected to grow at 6 percent per year forever. Current market price per share is Rs. 400.
a. Calculate company's after tax cost of new debt and new cost of common equity, assuming that new equity comes only from retained earnings.
b. What will be the company's weighted average cost of capital? Assume the company maintains present capital.