QUESTION 2 - Cost of Capital Compute the cost for the following: A. A bond that has a RM1,000 par value (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a floatation cost of 5 percent of the RM1,125 market value. The bonds mature in 10 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. B. A new common stock issue that paid a RM1.80 dividend last year. The par value of the stock is RM15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now RM27.50, but 5 percent flotation costs are anticipated. C. Internal common equity where the current market price of the common stock is RM43. The expected dividend this coming year should be RM3.50, increasing thereafter at a 7 percent annual growth rate. The corporation's tax rate is 34 percent. D. A preferred stock paying a 9 percent dividend on a RM150 per value. If a new issue is offered, floatation costs will be 12 percent of the current price of RM175.
QUESTION 2 - Cost of Capital Compute the cost for the following: A. A bond that has a RM1,000 par value (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a floatation cost of 5 percent of the RM1,125 market value. The bonds mature in 10 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. B. A new common stock issue that paid a RM1.80 dividend last year. The par value of the stock is RM15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now RM27.50, but 5 percent flotation costs are anticipated. C. Internal common equity where the current market price of the common stock is RM43. The expected dividend this coming year should be RM3.50, increasing thereafter at a 7 percent annual growth rate. The corporation's tax rate is 34 percent. D. A preferred stock paying a 9 percent dividend on a RM150 per value. If a new issue is offered, floatation costs will be 12 percent of the current price of RM175.
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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Concept explainers
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.
Question
Transcribed Image Text:QUESTION 2 - Cost of Capital
Compute the cost for the following:
A. A bond that has a RM1,000 par value (face value) and a contract or coupon interest rate of 11
percent. A new issue would have a floatation cost of 5 percent of the RM1,125 market value.
The bonds mature in 10 years. The firm's average tax rate is 30 percent and its marginal tax
rate is 34 percent.
B. A new common stock issue that paid a RM1.80 dividend last year. The par value of the stock
is RM15, and earnings per share have grown at a rate of 7 percent per year. This growth rate
is expected to continue into the foreseeable future. The company maintains a constant
dividend-earnings ratio of 30 percent. The price of this stock is now RM27.50, but 5 percent
flotation costs are anticipated.
C. Internal common equity where the current market price of the common stock is RM43. The
expected dividend this coming year should be RM3.50, increasing thereafter at a 7 percent
annual growth rate. The corporation's tax rate is 34 percent.
D. A preferred stock paying a 9 percent dividend on a RM150 per value. If a new issue is offered,
floatation costs will be 12 percent of the current price of RM175.
Transcribed Image Text:E. A bond selling to yield 12 percent after floatation costs, but prior to adjusting for the marginal
corporate tax rate of 34 percent. In other words, 12 percent is the rate that equates the net
proceeds from the bond with the present value of the future cash flows (principal and intrest).
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