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Number of outstanding shares | 2500000 |

Price of each share | Rs. 48/- |

Market value for bonds | Rs. 30000000/- |

Risk free rate ( 10 year treasury) | 2.75% |

Cost of rate of return on company bonds (cost of return) | 5.90% |

Corporate tax | 22.25% |

Investor risk premium | 5.60% |

Company stock beta | 1.25 |

The solution is mentioned below −

Market value (A) = no.of shares * price => 2500000 * 48 => Rs. 120000000/-

Determine company debt = 30000000

Cost of equity = 2.75% +5.60*1.25 => 0.0975

Cost of debt = 5.90*(1-22.25%) => 0.046

Weight of cost of capital = (R/V*Ke)+(D/V)*Kd*(1-tax rate)

=(120000000/150000000)*0.0975 + (30000000/150000000)*0.046

= 0.078+0.0092

= 0.0872

= 8.72 %

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