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 component and
• Calculate the weighted average cost of capital.