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Capital Structure Cost Analysis

The document provides steps to calculate a company's weighted average cost of capital (WACC). It lists the costs of different sources of capital like equity, preference shares, debentures and debt. It then calculates the weightings of each capital source and determines the individual costs. The WACC is then calculated by applying the individual costs to their respective weightings.

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nonzuzossy
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90 views5 pages

Capital Structure Cost Analysis

The document provides steps to calculate a company's weighted average cost of capital (WACC). It lists the costs of different sources of capital like equity, preference shares, debentures and debt. It then calculates the weightings of each capital source and determines the individual costs. The WACC is then calculated by applying the individual costs to their respective weightings.

Uploaded by

nonzuzossy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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step 1 - market value of your capital structure

step 2 - work out your weightings of each capital proposed to your capital structure
step 3 work out your individual cost of capital for each element of your capital structure
step 4 = apply each cost of capital calculated to your weighting for that cost of capital - this is now going to give you your W

step 1
Ke Cost of equity 4,500,000
Kp Cost of preference shares 2,000,000
Kd1 Cost of debenture 951,356
Kd2 Cost of debt 900,000 9.8
Total capital structure 8,351,356

Step 1 step 2
capital structure Weightings or proportions
Ke Cost of equity 4,500,000 53.88%
Kp Cost of preference shares 2,000,000 23.95%
Kd1 Cost of debentures 951356 11.39%
Kd2 Cost of debt 900000 10.78%
Total capital structure 8,351,356 100.00%

step 3
Cost of equity
D0 90c Gordon Growth Formula
D1 1.02 Growth D1/P0+Growth
34% 13% 47%

cost of preference shares


6% D1/P0 12c

Kd1 debentures
7%

Kd2 Long term loan


9.80%

CAPM market premium Ke


Risk free rate + Beta(Market Risk - Risk free rate)
= 7+1.7(15%-7%)
20.6 Ke

income statement 000


Sales 1000
cost of sales 600
Gross Profit 400
Other expenses 200 Payroll, rent
PBT and Interst 200
interest 100 you essentially received a deduction which is a saving in resp
PBT 100
Tax 30
PAT 70
al - this is now going to give you your WEIGHTED AVERAGE COST OF CAPITAL

90c D0
1.017 D1

cost of each element


of capital structure
step 3 step 4
47% 25.27%
6% 1.44%
7% 0.80%
9.80% 1.06%
WACC 28.56%

Ke

Kp

Kd1

kd2
deduction which is a saving in resp 70 100
0.70%

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