This document discusses the calculation of weighted average cost of capital (WACC) using different methods and capital structures. It provides an example calculating WACC based on book values and market values using the proportions and costs of various sources of capital - equity shares, debentures, retained earnings. The WACC is computed in 1-3 sentences using both weighted proportions and total costs, with results ranging from 11.09% to 20.38% depending on the values and method used.

1. FINANCIAL MANAGEMENT
COST OF CAPITAL
BY:
SMT.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE& MANAGEMENT
SMT. V G DEGREE COLLEGEFOR WOMEN, KALABURAGI

2. WEIGHTED AVERAGE COST OF CAPITAL
(WACC)

3. WEIGHTED AVERAGE COST OF CAPITAL (WACC)
(OVERALL COST OF CAPITAL = KO)
Meaning:
Weighted average cost is the average of the costs of specific sources of
capital employed in a business, properly weighted by the proportion they
hold in the firm’s capital structure.
According to ICMA London:
“Weighted average cost of capital is the average cost of company’s
finance weighted according to the proportion each element bears to the
total pool of capital, weighing is usually based on market valuations
current yield and costs after tax.”

4. COMPUTATION OF WEIGHTED AVERAGE COST
 The concept of weighted average cost is simple and requires the following
steps:
1. Computation of weights (proportions) to be assigned to each type of
funds.
2. Assignment of costs of various sources of capital.
3. Adding of the weighted cost of all sources of funds to get an overall
weighted average cost of capital.

5. BOOK VALUE & MARKET VALUE
Book Value :
Value shown in the balance sheet is called book value. Weightage to each source of finance
is given on the basis of book value as recorded in the balance sheet.
Market Value :
Market value represent prices of prevailing in the stock market for securities. So current
market price are applied in ascertaining the weightage.

6. 43. From the following information calculate weighted average cost of capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%
Solution:
Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures *
100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
0.1109 * 100 = 11.09%

7. Solution:
Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures *
100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
0.1109 * 100 = 11.09%

8. Calculation of Weighted Average Cost of Capital
2. Using Market Value
Based on weights
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
𝟏,𝟓𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.11
𝟏𝟐,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.89
0.12
0.11
0.11 * 0.12 = 0.0132
0.89 * 0.11 = 0.0979
13,50,000 1.00 0.1111
0.1111 * 100 = 11.11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%

9. Calculation of Weighted Average Cost of Capital
1. Using Book Value
Based on Total Cost
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
12%
11%
12,000
1,10,000
11,00,000 1,22,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,22,000
11,00,000
∗ 100 = 11.18% = 11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%

10. 2. Using Market Value
Based on Total Cost
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
12%
11%
18,000
1,32,000
13,50,000 1,50,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,50,000
13,50,000
∗ 100 = 11.11% = 11%
43. From the following information calculate weighted average cost of
capital.
1. Equity shares 10,000 of Rs.10 each.
Market price Rs.15 each
Ke = 12%
2. Debentures 10,000 of Rs.100 each
Market value Rs.120 each
Kd = (after tax) 11%

11. Solution:
Calculation of Weighted Average Cost of Capital -- Based on weights
1. Using Book Value -- 11.09%
2. Using Market Value -- 11.11%
Calculation of Weighted Average Cost of Capital -- Based on Total Cost
1. Using Book Value -- 11.18%
2. Using Market Value -- 11.11%

12. Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
𝟏,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.09
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟏,𝟎𝟎,𝟎𝟎𝟎
= 0.91
0.12
0.11
0.09 * 0.12 = 0.0108
0.91 * 0.11 = 0.1001
11,00,000 1.00 0.1109
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
𝟏,𝟓𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.11
𝟏𝟐,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟑,𝟓𝟎,𝟎𝟎𝟎
= 0.89
0.12
0.11
0.11 * 0.12 = 0.0132
0.89 * 0.11 = 0.0979
13,50,000 1.00 0.1111
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 10 each
Debentures
10,000 Debentures * 100
1,00,000
10,00,000
12%
11%
12,000
1,10,000
11,00,000 1,22,000
Sources of capital Amount Cost of capital Total Cost
Equity Capital
10,000 shares * 15 each
Debentures
10,000 Debentures * 120
1,50,000
12,00,000
12%
11%
18,000
1,32,000
13,50,000 1,50,000
Solution:
Calculation of Weighted Average Cost of Capital -- Based on
weights
1. Using Book Value -- 11.09%
2. Using Market Value -- 11.11%
Calculation of Weighted Average Cost of Capital -- Based on Total Cost
1. Using Book Value -- 11.18%
2. Using Market Value -- 11.11%
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,50,000
13,50,000
∗ 100 = 11.11% = 11
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
1,22,000
11,00,000
∗ 100 = 11.18% =
11%

13. 44. A Ltd has the following capital structure:
Equity expected dividend 12% Rs.20,00,000
10% Preference Shares Rs.10,00,000
8% Debt Rs.30,00,000
You are required to calculate weighted average cost of capital assuming 50% as the rate of
tax, before and after tax.

14. Solution:
1. Calculation of Weighted Average Cost of Capital based on Total Cost. Before Tax:
Sources of capital Amount Cost of capital Total Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
12%
10%
8%
2,40,000
1,00,000
2,40,000
60,00,000 5,80,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
5,80,000
60,00,000
∗ 100 = 𝟗. 𝟔𝟕%
2. Calculation of Weighted Average Cost of Capital based on Weights. Before Tax:
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
33.33
16.67
50.00
12% (0.12)
10% (0.10)
8% (0.08)
(33.33 * 0.12) = 4.00
(16.67 * 0.10) = 1.67
(50 * 0.08) = 4.00
60,00,000 100
9.67
𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 33.33
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 16.67
𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 50.00

15. 3. Calculation of Weighted Average Cost of Capital based on Total Cost. After Tax:
Sources of capital Amount Cost of capital Total Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
12%
10%
(Tax 50% , 50% 0f 8% = 4%)
4%
2,40,000
1,00,000
1,20,000
60,00,000 4,60,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
4,60,000
60,00,000
∗ 100 = 𝟕. 𝟔𝟕%
4. Calculation of Weighted Average Cost of Capital based on Weights. After Tax:
Sources of capital Amount Proportion Cost of capital Weighted Cost
Equity Capital
Preference Share
Debt
20,00,000
10,00,000
30,00,000
33.33
16.67
50.00
12% (0.12)
10% (0.10)
4% (0.04)
(Tax 50% , 50% 0f 8% =
4%)
(33.33 * 0.12) = 4.00
(16.67 * 0.10) = 1.67
(50 * 0.04) = 2.00
60,00,000 100
7.67
𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 33.33
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 16.67
𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
* 100= 50.00

16. 48. Following are the details regarding the capital structure of a company.
You are required to calculate weighted average cost of capital using:
a) Book Value of weights.
b) Market Value of Weights.
Sources of Book Value Market Value Specific Cost
Debentures 80,000 76,000 10%
Preference Shares 20,000 22,000 15%
Equity Shares 1,20,000 1,80,000 30%
Retained Earnings 40,000 60,000 15%

17. Solution: Based on Total Cost
Calculation of Weighted Average Cost of Capital based on Total Cost using Book Value.
Sources of capital Book Value - Amount Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
80,000
20,000
1,20,000
40,000
10%
15%
30%
15%
8,000
3,000
36,000
6,000
2,60,000 53,000
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
53,000
2,60,000
∗ 100 = 𝟐𝟎. 𝟑𝟖%
Sources of capital Market Value - Amount Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
76,000
22,000
1,80,000
60,000
10%
15%
30%
15%
7,600
3,300
54,000
9,000
3,38,000 73,900
Weighted Average Cost of Capital =
Total Cost
Total Amount
=
73,900
3,38,000
∗ 100 = 𝟐𝟏. 𝟖𝟔%
Calculation of Weighted Average Cost of Capital based on Total Cost using Market Value.

18. Based on Weights
Calculation of Weighted Average Cost of Capital based on Weights using Book Value.
Sources of capital Book Value
Amount
Proportion Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
80,000
20,000
1,20,000
40,000
30.76
7.69
46.16
15.39
10%(0.10)
15%(0.15)
30%(0.30)
15%(0.15)
30.76 * 0.10 = 3.076
7.69 * 0.15 = 1.1535
46.16 * 0.30 = 13.848
15.39 * 0.15 = 2.3085
2,60,000 100 20.386
𝟖𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 30.76
𝟐𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 7.69
𝟏,𝟐𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 46.16
𝟒𝟎,𝟎𝟎𝟎
𝟐,𝟔𝟎,𝟎𝟎𝟎
* 100= 15.39

19. Based on Weights
Calculation of Weighted Average Cost of Capital based on Weights using Market Value.
Sources of capital Book Value
Amount
Proportion Cost of capital Total Cost
Debentures
Preference Shares
Equity Shares
Retained Earnings
76,000
22,000
1,80,000
60,000
22.49
6.51
53.25
17.75
10%(0.10)
15%(0.15)
30%(0.30)
15%(0.15)
22.49 * 0.10 = 2.249
6.51 * 0.15 = 0.978
53.25 * 0.30 = 15.975
17.75 * 0.15 = 2.663
3,38,000 100 21.865
𝟕𝟔,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 22.49
𝟐𝟐,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 6.51
𝟏,𝟖𝟎,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 53.25
𝟔𝟎,𝟎𝟎𝟎
𝟑,𝟑𝟖,𝟎𝟎𝟎
* 100= 17.75

20. THANK YOU