G-Mart operates a very successful chain of hardware shop in Malaysia. The company needs to raise funds for its planned expansion into the northern part of Malaysia. The firm’s balance sheet at the close of 2021 appeared as follows: Cash Accounts Receivable Inventories Net Plant and Equipment Total Assets RM2,010,000 RM4,580,000 RM1,540,000 RM32,575,000 RM40,705,000 Long-term Debt Common Equity Total Debt and Equity RM 8,141,000 RM32,564,000 RM40,705,000 The company’s management estimates that the market requires 15 percent return on its common stock, the firm’s bonds command a yield to maturity of 7.5 percent, and the firm faces a tax rate of 30 percent. At the end of the previous year G-Mart’s common stock was selling for a price 1.5 times its book value, and its bonds were trading near their par value. Explain the current capital structure of G-Mart. Calculate the cost of capital for G-Mart. If G-Mart stock price were to fall 0.8 times book value and the cost of equity fell to 12.5 percent, calculate the firm’s weighted average cost of capital (assume the cost of debt and tax rate do not change).
G-Mart operates a very successful chain of hardware shop in Malaysia. The company needs to raise funds for its planned expansion into the northern part of Malaysia. The firm’s balance sheet at the close of 2021 appeared as follows:
|
Cash Accounts Receivable Inventories Net Plant and Equipment
Total Assets |
RM2,010,000 RM4,580,000 RM1,540,000 RM32,575,000
RM40,705,000 |
Long-term Debt Common Equity
Total Debt and Equity |
RM 8,141,000 RM32,564,000
RM40,705,000
|
The company’s management estimates that the market requires 15 percent return on its common stock, the firm’s bonds command a yield to maturity of 7.5 percent, and the firm faces a tax rate of 30 percent. At the end of the previous year G-Mart’s common stock was selling for a price 1.5 times its book
- Explain the current capital structure of G-Mart.
- Calculate the cost of capital for G-Mart.
- If G-Mart stock price were to fall 0.8 times book value and the
cost of equity fell to 12.5 percent, calculate the firm’s weighted average cost of capital (assume the cost of debt and tax rate do not change).
Step by step
Solved in 4 steps
