Reference no: EM133001015

Suntrack Ltd., a pharma company, was established in 1995 by Mr Ganpati, a renowned name in the medical profession. The company has one of the best research and developments facilities in the world and since its launch the company has already patented six products. Mr Ganpati`s younger son Riteshwar has recently joined as the Director (Finance). Riteshwar is interested in modernizing the production facilities and for that company might be requiring Rs 100 crores. Before taking any decision, Riteshwar would like to know the existing cost of capital of the company. You are working as a General Manager (Finance) and Riteshwar tells you to meet him in the evening to have a discussion on the same.

Existing Book Value Capital Structure
Equity Capital (40 million shares, Rs 10 par)
Rs 400 million
Preference Capital, 9% ( 1 million preference shares, Rs 100 par)
Rs 100 million
Retained Earnings
Rs. 150 million
Debentures, 11% ( 2 million debentures, Rs 100 par)
Rs. 200 million
Term Loans, 12%
Rs. 60 million
Total
Rs 910 million

Additional information available:
(a) Equity Capital: Next expected dividend is Rs 3 per share and dividend per share is expected to grow at rate of 4%. Current market price of share is Rs 30.
(b) Preference Capital: Preference shares would be maturing at par after 7 years. Current market price of preference share is Rs 93.
(c) Debentures: Debentures would be maturing at par after 4 years. Current market price of debenture is Rs 102.
(d) Tax rate for the company is 30%.

Before meeting, you are required to be ready with the report consisting of following calculations:
(1) Cost of all sources of capital relevant for the calculation of overall cost of capital of the company.
(2) Weighted Average Cost of Capital (WACC) as per book value and market value proportions.
(3) What is opportunity cost of capital? Why cost of capital is important for the firm?