The capital structure for the Ewasih Bits & Bites is provided here: Capital structure RM’000 Bond 4,400 Preferred stock 1,000 Common stock 14,800 The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%. The common stock market price is RM22.50. the company’s executive anticipates a dividend constant growth rate of 7% and dividend for last year was RM2.14 . To issue the new common stock, company will incur a floatation cost of RM2.50. Calculate the firm’s weighted average cost of capital (WACC).
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 2
The capital structure for the Ewasih Bits & Bites is provided here:
|
Capital structure |
RM’000 |
|
Bond |
4,400 |
|
|
1,000 |
|
Common stock |
14,800 |
The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%.
The common stock market price is RM22.50. the company’s executive anticipates a dividend constant growth rate of 7% and dividend for last year was RM2.14 . To issue the new common stock, company will incur a floatation cost of RM2.50.
Calculate the firm’s weighted average cost of capital (WACC).
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