Answered step by step
Verified Expert Solution
Question
1 Approved Answer
emergency can anyone help me to answer the above question ? Ctech Bhd. wants to estimate its cost of capital. The company employs you as
emergency can anyone help me to answer the above question ?
Ctech Bhd. wants to estimate its cost of capital. The company employs you as the financial consultant for the estimation purpose. You have been provided with the following information: The debt-financing of the company is fueled by the corporate bonds that mature in 5 years from now. The before-tax cost of debt associated to the corporate bonds is 11%. The equity-financing of the company solely comes from retained earnings for the time being, which is amounted to RM8,000,000 from previous year's operations. The company has recently declared a dividend payment of RM4.00 per common share, at which the market price is RM80 per share. The company believes the dividend growth of 4% will maintain for a long future. Flotation costs of 3% of market price will be charged if the company wishes to expands its equity through new issue of common stock. Ctech Bhd. has never issued any preferred shares and it has a debt-to-equity ratio of 1.00. The company falls under 35% tax bracket. (i) Calculate the existing weighted cost of capital (WACC) of Ctech Bhd. (6 marks) (ii) Assuming that Ctech Bhd. has exhausted its retained earnings. Find the corresponding breakpoint and the new WACC if the company chooses to finance its equity through new issue of common stock. (6 marks) The required rate of return asks by bondholders is equivalent to the cost of debt bears by the bond-issuer." Is the statement true or false? Explain. (3 marks) [Total: 30 marks] Ctech Bhd. wants to estimate its cost of capital. The company employs you as the financial consultant for the estimation purpose. You have been provided with the following information: The debt-financing of the company is fueled by the corporate bonds that mature in 5 years from now. The before-tax cost of debt associated to the corporate bonds is 11%. The equity-financing of the company solely comes from retained earnings for the time being, which is amounted to RM8,000,000 from previous year's operations. The company has recently declared a dividend payment of RM4.00 per common share, at which the market price is RM80 per share. The company believes the dividend growth of 4% will maintain for a long future. Flotation costs of 3% of market price will be charged if the company wishes to expands its equity through new issue of common stock. Ctech Bhd. has never issued any preferred shares and it has a debt-to-equity ratio of 1.00. The company falls under 35% tax bracket. (i) Calculate the existing weighted cost of capital (WACC) of Ctech Bhd. (6 marks) (ii) Assuming that Ctech Bhd. has exhausted its retained earnings. Find the corresponding breakpoint and the new WACC if the company chooses to finance its equity through new issue of common stock. (6 marks) The required rate of return asks by bondholders is equivalent to the cost of debt bears by the bond-issuer." Is the statement true or false? Explain. (3 marks) [Total: 30 marks]Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started