LS0904: Kuber Company has a target capital structure of 50% debt and 50% equity, with an after-tax cost of debt of 8%. Cost of retained earnings is 14%. Its profit after tax is Rs, 250,000. Kuber is considering the following projects to invest in

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Question: Kuber Company has a target capital structure of 50% debt and 50% equity, with an after-tax cost of debt of 8%. Cost of retained earnings is 14%. Its profit after tax is Rs, 250,000. Kuber is considering the following projects to invest in

Find the company’s weighted average cost of capital.

If the company accepts all the projects that it could invest in just from its profit after tax and considering their IRRs, which projects should it take up? Give reason. What will be its total investment in these projects?

Taking into account its target capital structure, how much of equity portion should the company invest in these projects? If the company follows Irrelevance Approach (Modigliani and Miller) or residual dividend policy, what will be its dividend payout ratio?


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