Reference no: EM132392763

Silicon Inc., is a fast growing company in the textile industry. The balance sheet of the company is as under:

Silicon Company

Balance Sheet

                                                                      July 31, 2018                                                      Rs. (000)

   Cash                                                   20,000                   Accounts payable                                           20,000

  Accounts receivable                          40,000                    Accruals                                                        20,000

  Inventories                                          40,000                    Short-term debt                                     10,000

  Current assets                                100,000                    Current liabilities                                       50,000

  Net fixed assets                                100,000                    Long-term debt                                     60,000

                                                                                              Preferred stock                                    10,000

                                                                                               Common equity:

                                                                                               Common stock                                    20,000

                                                                                            Retained earnings                                         60,000

Total assets                                       200,000                      Total liabilities & equity                      200,000

The company is in process of calculating weighted average cost of capital to be used for appraisal of the investment projects having the same risk class as the firm's existing average assets. The relevant facts are as under:

• Short-term debt represents 10 % bank loans with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis, so in the off-season, bank loans are zero.
• The long-term debt consists of 20-year, semiannual payment, Term Finance Certificates (TFCs) of Rs.1000 face value with a coupon rate of 8 %.Currently, the market price of TFC is Rs.950.
• Silicon's preferred stock has Rs.100 par value. The company pays a quarterly dividend of Rs.2, and has 11 % yields to investors. New perpetual preferred stock would have to provide the same yield to investors.
• The company has 2 million common shares outstanding. Current price ( P₀ ) of the stock is Rs.20.It has recently paid a dividend ( D₀ ) of Rs.1 and current earning per share ( EPS₀ ) is Rs.2. The dividends are expected to grow at a constant rate of 5% in the foreseeable future.
• The security analysts have calculated betas as 1.50. The risk free rate is 10 %; and estimated market return is 15 %.
• For the bond-yield risk premium approach, a risk premium is 5 %
• Silicon Company falls under 40 % tax bracket.

Required:

a) Calculate the market value of each component of capital structure.

b) Determine the cost of each component of capital structure. Calculate the cost of equity using capital asset pricing model (CAPM), discounted cash flow (DCF) and bond-yield risk premium.

c) What is the company's weighted average cost of capital (WACC) using CAPM for cost of equity.