External financing with same cost of capital, Financial Management

Assignment Help:

External Financing with Same Cost of Capital and Same Proportions as Existing: If a firm raises new capital funds in the same proportion as at present and at the same specific cost of capital as at present, then WMCC is equal to the WACC. Consider a firm having obtained 50%, 40% and 10% of the total funds by the issue of equity share capital, preference share capital and 10% debt. These sources have 10%, 9% and 5% as their specific cost of capital. Now, the WACC of the firm is:

WACC = .5 (.10) + .4(.09) + .1 (.05) = .091 or 9.1 %.

In order to finance an investment proposal of Rs. 10,00,000, the firm proposes to procure Rs. 5,00,000 by the issue of equity share capital, Rs. 4,00,000 by the issue of preference share capital and Rs. 1,00,000 by the issue of 10% debentures. It estimates that the cost of capital of additional funds will be same as at present. Since the proportion of different sources of new fi¬nancing in the total new financing is the same as at present Le., 50% equity capital, 40% prefer¬ence share capital and 10% by debentures, the WMCC can be calculated as follows:

WMCC = .5 (.10) + .4 (.09) + .1 (.05) = .091 or 9.1%.

So, the WMCC is equal to the WACC.


Related Discussions:- External financing with same cost of capital

Calculate total development cost, A developer has purchased a commercial of...

A developer has purchased a commercial office site in Melbourne and wishes to develop a building which will be sold to an institutional owner before completion of the building.

Define that an option is in-, What is meant by the terms that an option is ...

What is meant by the terms that an option is in-, at-, or out-of-the-money? Answer:  A call or put option with S t > E (E > S t ) is considered to as trading in-the-money.  If

Calculate the expected return and standard deviation, Benjamin Tang current...

Benjamin Tang currently has holdings in the following three companies:                                                                             E(R)                      σ

Explain the sensitivity analysis of burley plc, Sensitivity analysis A ...

Sensitivity analysis A sensitivity analysis studies the impact of specified variations in key factors on the initially-calculated NPV. The initial point for a sensitivity analy

Explain the fixed and floating rates, Question 1 Globalization is a pro...

Question 1 Globalization is a process of international integration that arises due to increasing human connectivity as well as the interchange of products, ideas and other aspe

Define double-entry bookkeeping, Q. Define Double-Entry Bookkeeping? Do...

Q. Define Double-Entry Bookkeeping? Double-Entry Bookkeeping - Method of recording financial transactions in that every transaction is entered in two or more accounts and inclu

Calculate the net present value, Tri-City Industries is considering two pos...

Tri-City Industries is considering two possible capital projects. Project A requires an initial investment of $240,000 and provides cash flows before tax of $120,000 in year one, $

Measuring interest rate risk , Investors are always interested in est...

Investors are always interested in estimating the price sensitivity of a bond to change in market interest rates. Let us study how prices change both in terms of

Global bonds, A debt obligation that is issued and traded both in the...

A debt obligation that is issued and traded both in the US bond market and the Eurobond market is referred to as global bond. For an entity to issue global bonds,

Example on modigliani and miller approach, Q. Example On modigliani and mil...

Q. Example On modigliani and miller approach? The subsequent is the data regarding two companies X and Y belonging to the same risk class: Company X

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd