Amity Business School

Amity Business School

Semester II
FINANCIAL MANAGEMENT
MODULE III

Cost of Capital

1
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Weighted Average cost of Capital

Weighted Av. Cost of capital is the average cost of

the costs of various sources of financing. Also
known as Composite cost of capital

Weights are assigned either on Book value basis or

Market Value basis.
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Marginal Cost of Capital

Cost of Capital of the additional funds is called the
Marginal Cost of Capital.

If the additional financing uses more than one source,

say a combination of debt and equity, then the WACC
of new financing is called the Weighted Marginal Cost
of Capital ( WMCC)
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Calculation of WMCC
1. The WMCC is calculated on the basis of
market value weights because the new
funds are to be raised at the market
values.
2. The specific cost of capital can be
accurately calculated.
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Weightage Average Cost Of Capital
Q1. A firm has the following capital structure and after tax cost for the different sources of funds.
used

Source of funds Amount After tax cost

Debt Rs 15,00,000 8%
Preference shares Rs 12,00,000 10%
Equity shares Rs 18,00,000 15%
Retained Earnings Rs 15,00,000 11%

You are required to calculate the Weightage Average cost of Capital

(1) Book Value Based
(2) Market value based if the firm has 18000 equity shares of Rs 100 each outstanding
and the current market price is Rs 300 per share.
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Q2. JK cements Ltd has the following Capital Structure:

Particulars Market value Book Value Cost (after tax)

Equity Share 80 lakhs 120 lakhs 18%
Preference share 30 lakhs 20 lakhs 15%
Debenture 40 lakhs 40 lakhs 14%
Calculate the companys weighted Average Cost of Capital based on book value &
Market value

Q3.ANZ has a gearing ratio of 40%. Its cost of equity is 21% and cost of debt is 15%
Calculate the companys WACC

Q4. The required rate of return on equity is 16% and the cost of Debt is 12%. The firm
Has a capital structure mix of 60% equity and 40% debt. What should be the overall
rate of Return of the firm to maintain its market value