XYZ, a Telecom Company, has the following capital structure,which is considered

Question

XYZ, a Telecom Company, has the following capital structure,which is considered to be optimal:

Debentures    20%

Preferred stock   20%

Common equity  60%

Total                 100%

During this tax year, company is liable to pay tax @ 35%, andinvestors are expecting

that earnings and dividends will grow at a constant rate of 10%.Current year’s dividend

is Rs. 4 per share and the common stocks are selling at Rs. 60per share.

XYZ can obtain new capital in the following ways:

Preferred stock: New preferred stock with adividend of Rs. 15 can be sold to the public

at a price of Rs. 97 per share.

Debentures: Debentures can be sold at aninterest rate of 13%.

You are required to

• Determine the cost of each capital structure componentand

• Calculate the weighted average cost of capital.

Explanation / Answer

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