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Tutorial Sheet 1

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10 views1 page

Tutorial Sheet 1

Uploaded by

happynessanthony01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TUTORIAL SHEET ONE

Question
A company has on its books the following amounts and specific costs of each type of capital.

Type of Capital Book Value Market Value Specific Costs (%)


Shs. Shs. After-tax costs
Debt 400,000 380,000 5
Preference 100,000 110,000 8
Equity 600000 900,000 15
Retained Earnings 200,000 300,000 3
Total 1,300,000 1,690,000

Required: Compute the weighted average cost of capital using:


(a) Book value weights, and
(b) Market value weights.
(c) How are they different? Can you think and explain a situation where the weighted average cost
of capital would be the same using either of the weights?

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