Debentures          = Rs.3 Billion

Preferred Shares = Rs.0.48 Billion

Common Shares   = Rs.6.52 Billion               

                        ------------------------------

Total                      = Rs.10 Billion

                        -------------------------------

Risk-free Rate (R _f) = 10%

Market Rate of Return (R _m) = 14%

Stock’s Beta = 1.5

Cost of Debt (R _d) = 9.5%

Preferred Stocks Return = 10%

Corporate Tax Rate (T _c )= 40%

Weighted Average Cost of Capital (WACC) = (E/V)*R_e  + (D/V)*R_d (1-T_c)

E/V = Rs.0.48 Billion + Rs.6.52 Billion = Rs.7Billion

       = Rs.7 Billion / Rs.10 Billion = 0.70

E/V = 0.70

D/V = Rs.3 Billion / Rs.10 Billion = 0.30

D/V = 0.30

Calculate the Return on Common Stock:

Return on Common Stock = 10% + 1.5*(14% - 10%)

                                           = 0.1 + 1.5*0.04

                                           = 0.16 (or) 16%

Return on Equity (R_e) = Return on Preferred Stock + Return on Common Stock

                                    = 10% + 16%

                               R_e = 26%

WACC = (0.70)*26% + (0.30)*9.5% (1-40%)

             = (0.70)*0.26 + (0.30)*0.095(0.6)

             = 0.182 + 0.0171

             = 0.1991 (or) 19.91

WACC= 20%