Twitter is capitalized as follows with preference shares equity shares retained earnings and

QUESTION

Twitter is capitalized as follows with preference shares, equity shares, retained earnings, and debentures All figures except the specific cost of capital are in $million Source Amount Specific Cost of capital Equity share of capital (two hundred thousand shares @$10 each 2 11% Preference Shares (50,000 shares @$ 10 each 0.5 8% Retained Earnings 1 11% 9% Debentures of $ 1,000 each 1.5 4.50% Presently the debentures are being valued at 94%. Preference shares at par and equity share at $ 13 per share. Find out the book value weights
First find out the book values of various elements of capital structure. The book value of preference share is $0.5 million, equity share capital is $2 million, retained earnings is $1 million and 9% debentures cost $1.5 million. The weights of the securities are 1%, 4%, 2% and 3% respectively. cost of capital is 8%, 11%, 11% and 4.5% respectively.

hen we calculate the weighted average cost of capital by multiplying weights by cost of capital. Finally we calculate the weighted average cost of capital by multiplying Book value by specific cost of capital and then summing them up.

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