Question
Crown Hill Berhad has a target capital structure consisting of debt (bond), preferred stock, and common stock. The capital structure for Crown Hill Berhad is
Crown Hill Berhad has a target capital structure consisting of debt (bond), preferred stock, and common stock. The capital structure for Crown Hill Berhad is as follows:
Source of Capital Market Value
Debt (bond) RM500,000
Preferred Stock RM300,000
Common Stock RM700,000
Debt
Crown Hill Berhads bond have a 12 percent coupon rate paid annually, with maturity period of 15 years and sells for RM1,050. The companys marginal tax rate is 34 percent.
Preferred Stock
The preferred stock could sell at RM120 per share, annual dividend were RM9.80 per share.
Common Stock
The closing price for Crown Hill Berhad common stock is RM49 per share. Last year the company has paid a dividend of RM1.30. Dividend are expected to grow at a rate of 9 percent per year.
Required;
- Calculate the frims capital stucture weights on a market value basis.
(
- If the Crown Hill is evaluating a new investment project that has the same risk as the firms typical project, determine the rate should the firm used to discount (weightage average cost of capital) the projects cash flows?
- The companys president has approached you about Crown Hills capital structure. He wants to know why the company doesnt used more preferred stock financing because it costs less than debts. What would you tell the president?
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