Compute the costs for each of the sources of financing: i. The retained earnings is RM4.2 million. The price of the common stock is RM48.00 per share, and the expected dividend this coming year should be RM2.80, increasing thereafter at a 5 percent annual growth rate. The corporation’s tax rate is at 29 percent. ii. New common stock issue paid a RM2.66 dividends last year. The company’s dividends per share should continue to increase at a 5 percent growth rate into the indefinite future. The market price of the stock is currently RM48.00, however, flotation costs of RM4.50 per share are expected if the new stock is issued. iii. A preferred stock selling for RM55.00 with an annual dividend payment o
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Compute the costs for each of the sources of financing:
i. The
ii. New common stock issue paid a RM2.66 dividends last year. The company’s dividends per share should continue to increase at a 5 percent growth rate into the indefinite future. The market price of the stock is currently RM48.00, however, flotation costs of RM4.50 per share are expected if the new stock is issued.
iii. A
iv. A RM1,000.00 par
Based on the computation, which sources should be considered to be taken by the manager?
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