The company's new proposed capital structure to finance the chosen project is as follows: Cost of financing Bonds Sources of financing Preferred shares Ordinary shares i) ii) The cost of debt (before tax) is 10 percent for the first RM2,500,000. The cost of any additional debt (before tax) is 12.5 percent. The after tax cost of preferred share is 8 percent for the first RM1,000,000 and above that it will be 11 percent. urrently, the company has RM3,600,000 bonds, RM1,600,000 preferred shares and M2,800,000 ordinary shares for its capital structure. Assume that the marginal tax rate is 28 percent. The company intends to issue ordinary shares at RM15 per share and it is expected to pay a dividend of RM2.25. Earnings are expected to grow at 6 percent and the floatation cost of issuing this ordinary share will be at 4 percent of the selling price. Calculate the cost of capital for each of the financial instruments. Determine the weighted average cost of capital (WACC) for each range of financing.
The company's new proposed capital structure to finance the chosen project is as follows: Cost of financing Bonds Sources of financing Preferred shares Ordinary shares i) ii) The cost of debt (before tax) is 10 percent for the first RM2,500,000. The cost of any additional debt (before tax) is 12.5 percent. The after tax cost of preferred share is 8 percent for the first RM1,000,000 and above that it will be 11 percent. urrently, the company has RM3,600,000 bonds, RM1,600,000 preferred shares and M2,800,000 ordinary shares for its capital structure. Assume that the marginal tax rate is 28 percent. The company intends to issue ordinary shares at RM15 per share and it is expected to pay a dividend of RM2.25. Earnings are expected to grow at 6 percent and the floatation cost of issuing this ordinary share will be at 4 percent of the selling price. Calculate the cost of capital for each of the financial instruments. Determine the weighted average cost of capital (WACC) for each range of financing.
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:The company's new proposed capital structure to finance the chosen project is as follows:
Sources of
Cost of financing
financing
The cost of debt (before tax) is 10 percent for the first
RM2,500,000.
The cost of any additional debt (before tax) is 12.5 percent.
The after tax cost of preferred share is 8 percent for the first
RM1,000,000 and above that it will be 11 percent.
a)
Bonds
Preferred shares
Ordinary shares
Currently, the company has RM3,600,000 bonds, RM1,600,000 preferred shares and
RM2,800,000 ordinary shares for its capital structure.
Assume that the marginal tax rate is 28 percent.
i)
The company intends to issue ordinary shares at RM15 per share
and it is expected to pay a dividend of RM2.25. Earnings are
expected to grow at 6 percent and the floatation cost of issuing
this ordinary share will be at 4 percent of the selling price.
ii)
Calculate the cost of capital for each of the financial instruments.
Determine the weighted average cost of capital (WACC) for each range of
financing.
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