The capital structure of Hindustan Traders Ltd. As on 31.3.2000 is as follows:?

Equity capital: 100 lakh equity shares of Rs.10 each Rs.10 Crores
Reserves and Surplus 2 Crores
14% debentures of Rs. 100 each 3 Crores
For the year ended 31.3.2000 the company has paid equity dividend at 20%. As the Company is a market leader with good future, dividend is likely to grow by 5% every year. The equity shares are now traded at Rs.80 per share on the stock exchange. Income tax rate applicable to the Company is 50%.
(a) Compute the current weighted average cost of capital.
(b) The Company has plans to raise in future Rs.5 Crores by way of floating long-term loan at 16% interest. When this takes place the market value of the equity shares is expected to fall to Rs.50 per share. What will be the new weighted average cost of capital of the Company?

You will have to use your solution in part a to arrive at the solution for part b. This is a good problem. You will learn a lot by solving it. Good luck and have fun.

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