Aman Industries, a producer of automobile spares, is planning to diversify its production structure. In this context, it likes to evaluate the weighted average cost of capital required for the new...

Aman Industries, a producer of automobile spares, is planning to diversify its production structure. In this context, it likes to evaluate the weighted average cost of capital required for the new line of production. The latest balance sheet of the company shows the various liabilities and assets as follows:

The existing debentures have a par value of Rs 100, selling in the market at Rs 112. They have a coupon of 10% and a maturity of 8 years. The shares are selling at Rs 80 per share. The preceding year’s dividend was Rs 2.50 per share with an expected growth rate of 5%. Tax rate is 30%. The company is going to raise Rs 200 million for the new project. The debt–equity ratio will be 1:1.

1. Find out the cost of debt and the cost of equity.

 2. Find the existing weighted average cost of capital.

 3. Do you think that the weighted average cost of capital for the new project will be different from the present one?