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Calculating weighted average cost of capital

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The Shrike Paper Mill Ltd has the following capital structureEquity capital (30 million shares, Rs.10 par)

Rs.300 million

Preference capital, 15 percent (1,000,000 shares, Rs.100 par)

Rs. 100 million

Retained earnings

Rs. 100 million

Debentures 11 percent (2,500,000 debentures, Rs.100 par)

Rs.250 million

Term Loans, 13 percent

Rs. 300 million

The next expected dividend per share is Rs.4.00. The dividend per share is expected to grow at the rate of 15 percent. The market price per share is Rs.80.

Preference stock, redeemable after 6 years, is currently selling for Rs.110 per share.

Debentures, redeemable after 6 years, are selling for Rs.102 per debenture.

The tax rate for the company is 34 percent.

(a) Calculate the weighted average cost of capital using

(i) book value proportions, and

(ii) market value proportions

b) Why do companies prefer to use market value weights instead of book value weights while calculating weighted average cost of capital?

Reference no: EM132668390

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