CA INTERMEDIATE: COSTING & FM · COST OF CAPITAL

Weighted average cost of capital (WACC)

WACC = Σ (weight × cost). Use after-tax cost of debt: Kd = Interest rate × (1 − tax rate).

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Worked examples

Example 1 · level 1

Joshi Pharma Ltd’s capital structure (book values): Equity ₹120 lakh, Ke 16%; Debt ₹30 lakh, after-tax Kd 12%. Find the WACC (%), two decimals.

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Weights: equity 120/150, debt 30/150.
WACC = (120 × 16 + 30 × 12) ÷ 150 = 15.2%.

Answer: 15.2 %

Example 2 · level 2

Kapoor Electricals’s capital structure (book values): Equity ₹110 lakh, Ke 14%; Debentures ₹80 lakh at 10% interest. Tax rate 40%. Find the WACC (%), two decimals.

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After-tax Kd = 10 × 0.6 = 6%.
Weights: equity 110/190, debt 80/190.
WACC = (110 × 14 + 80 × 6) ÷ 190 = 10.63%.

Answer: 10.63 %

Example 3 · level 3

Bansal Steels Ltd’s capital structure (book values): Equity ₹90 lakh, Ke 16%; Debentures ₹70 lakh at 9% interest; Preference shares ₹30 lakh, Kp 11%. Tax rate 40%. Find the WACC (%), two decimals.

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After-tax Kd = 9 × 0.6 = 5.4%.
Weights: equity 90/190, debt 70/190, preference 30/190.
WACC = (90 × 16 + 70 × 5.4 + 30 × 11) ÷ 190 = 11.31%.

Answer: 11.31 %