Question
Brooklyn Berhad is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Johnson, the vice president of finance, has
Brooklyn Berhad is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Johnson, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.
The company has 10,000 bonds with a 12 percent coupon rate and a RM1,200 market price. It is estimated that the bond has a pre-tax cost of debt of 9 percent.
The company has 600,000 common stocks currently selling at RM60 per share. The expected dividend is RM5 per share. The equity beta for this company is 1.5. The riskfree rate is 4 percent, and the market returns are 11 percent.
In addition, the company has 300,000 preferred stocks currently selling at RM50 per share. The dividend is RM4 per share. The corporate tax rate is 25 percent. Compute the weighted average cost of capital for Brooklyn Berhad.
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