QUESTION 2 (25 MARKS) (a) A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.Source of Capital Target Market ProportionsLong Term Debt25% Preferred Stock15% Common Stock60% Total Firm Value100%Debt:The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945. 3Preferred Stock:The firm has determined it can issue preferred stock at RM70per share par value. The stock will pay a RM8annual dividend. Common Stock:A firm's common stock is currently selling for RM19per share. The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, thefirm's marginal tax rate is 35%. Determine the weighted average cost of capital for the firm. (15 marks)
QUESTION 2 (25 MARKS) (a) A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.Source of Capital Target Market ProportionsLong Term Debt25% Preferred Stock15% Common Stock60% Total Firm Value100%Debt:The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945. 3Preferred Stock:The firm has determined it can issue preferred stock at RM70per share par value. The stock will pay a RM8annual dividend. Common Stock:A firm's common stock is currently selling for RM19per share. The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, thefirm's marginal tax rate is 35%. Determine the weighted average cost of capital for the firm. (15 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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Transcribed Image Text:QUESTION 2 (25 MARKS) (a) A firm has determined
its optimal capital structure which is composed of the
following sources and target market value
proportions.Source of Capital Target Market
ProportionsLong Term Debt25% Preferred Stock15%
Common Stock60% Total Firm Value100%Debt:The
firm can sell a 10-year, RM1,000 par value, 6% bond
for RM945.
3Preferred Stock:The firm has determined it can issue
preferred stock at RM70per share par value. The
stock will pay a RM8annual dividend. Common
Stock:A firm's common stock is currently selling for
RM19per share. The dividend expected to be paid at
the end of the coming year is RM1.85. Its dividend
payments have been growing at a constant rate for
the last four years. Four years ago, the dividend was
RM1.50. Additionally, thefirm's marginal tax rate is
35%. Determine the weighted average cost of
capital for the firm. (15 marks)
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