QUESTION 1 (40 marks) Nona Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital.. Historically, the firm has raised capital in the following manner: Table of Source of Capital and Its Weight Source of Capital Weight Long Term Debt 15% Preferred Stock 25% Common Stock Equity 40% The tax rate of the firm is currently 40%. The needed financial information and data are as follows: Debt Nona can raise debt by selling RM1,000 par-value, 8.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of RM15 per bond needs to be given. There is an associated flotation cost of 2% of par value. Prefered stock Preferred stock can be sold under the following terms: The security has a par value of RM100 per share, the annual dividend rate is 7% of the par value, and the flotation cost is expected to be RM5 per share. The preferred stock is expected to sell for RM101 before cost considerations. Common stock The current price of Nona's common stock is RM28 per share. The cash dividend is expected to be RM2.80 per share next year. The firm's dividends have grown at an annual rate of 5%, and it is expected that the dividend will continue at this rate for the foreseeable future. The flotation costs are expected to be approximately RM1.50 per share. Nona can sell new common stock under these terms. Retained earnings. The firm expects to have available RM100,000 of retained earnings in the coming year. Once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. (Note: When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners.) Zarehan Selamat DFN5214 Page 3 Answer the following questions: a) Define the Weighted Average Cost of Capital (WACC). (3 marks) b ) Calculate the after-tax cost of debt (8 marks) c) Calculate the cost of preferred stock (5 marks) d) Calculate the cost of retained earnings (5 marks) e) Calculate the cost of new common stock (7 marks) f) Demonstrate the firm's weighted average cost of capital using retained earnings and the capital structure weights shown in the table above. (6 marks) g) Demonstrate the firm's weighted average cost of capital using new common stock and the capital structure weights shown in the table above. (6 marks)

QUESTION 1 (40 marks) Nona Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital.. Historically, the firm has raised capital in the following manner: Table of Source of Capital and Its Weight Source of Capital Weight Long Term Debt 15% Preferred Stock 25% Common Stock Equity 40% The tax rate of the firm is currently 40%. The needed financial information and data are as follows: Debt Nona can raise debt by selling RM1,000 par-value, 8.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of RM15 per bond needs to be given. There is an associated flotation cost of 2% of par value. Prefered stock Preferred stock can be sold under the following terms: The security has a par value of RM100 per share, the annual dividend rate is 7% of the par value, and the flotation cost is expected to be RM5 per share. The preferred stock is expected to sell for RM101 before cost considerations. Common stock The current price of Nona's common stock is RM28 per share. The cash dividend is expected to be RM2.80 per share next year. The firm's dividends have grown at an annual rate of 5%, and it is expected that the dividend will continue at this rate for the foreseeable future. The flotation costs are expected to be approximately RM1.50 per share. Nona can sell new common stock under these terms. Retained earnings. The firm expects to have available RM100,000 of retained earnings in the coming year. Once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. (Note: When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners.) Zarehan Selamat DFN5214 Page 3 Answer the following questions: a) Define the Weighted Average Cost of Capital (WACC). (3 marks) b ) Calculate the after-tax cost of debt (8 marks) c) Calculate the cost of preferred stock (5 marks) d) Calculate the cost of retained earnings (5 marks) e) Calculate the cost of new common stock (7 marks) f) Demonstrate the firm's weighted average cost of capital using retained earnings and the capital structure weights shown in the table above. (6 marks) g) Demonstrate the firm's weighted average cost of capital using new common stock and the capital structure weights shown in the table above. (6 marks)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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