Michael Berhad is financed through bonds and ordinary shares. The bonds were issued 5 years ago at a par value of RM100 (total funds raised RM5m). They carry an annual coupon of 10 per cent, are due to be redeemed in 4 years and are currently trading at RM105. The company’s shares have a market value of RM4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. Michael Berhad’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. Should Joy Berhad use the WACC for all future projects and SBUs? Explain your answer.
Michael Berhad is financed through bonds and ordinary shares. The bonds were issued 5 years ago at a par value of RM100 (total funds raised RM5m). They carry an annual coupon of 10 per cent, are due to be redeemed in 4 years and are currently trading at RM105.
The company’s shares have a market value of RM4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. Michael Berhad’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent.
- Calculate the cost of debt capital.
- Calculate the
cost of equity capital.
- Calculate the weighted average cost of capital.
Should Joy Berhad use the WACC for all future projects and SBUs? Explain your answer.
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