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Eminence Berhad issues bonds with a 7 percent coupon rate that mature in 15 years. The current market price and par value are RM1,207 and
Eminence Berhad issues bonds with a 7 percent coupon rate that mature in 15 years. The current market price and par value are RM1,207 and RM1,000, respectively. The interest is paid annually. At the same time, the company issues preferred stock at par value of RM10, which pays 10% annual dividend. The market price of the preferred stock is RM9 per share; however, the firm will net only RM8 per share. The company expects to retain RM480,000 of its earning to the following year. However, if there is a need to issue new shares of common stock, the selling price is RM3 per share. The flotation cost to issue these new shares is 10% of the selling price per share. The next dividend is expected to be RM0.15 per share, with constant dividend growth rate of 5 percent per year. The tax rate applicable to Eminence Berhad is 24%. On another note, the targeted capital structure of the company is 30% long-term debt, 10% preferred stock, and 60% equity. You are required to: (1) Estimate the cost of debt. (3 marks) (ii) Estimate the cost of preferred stock. (3 marks) (iii) Estimate the cost of retained earnings. (3 marks) (iv) Estimate the cost of newly issued common stock (3 marks) (v) Due to the unexpected high volatility and uncertainty in the financial market, the cost of debt is no longer constant. The initially estimated after-tax cost of debt is only applicable for a total debt of RM300,000. Beyond this amount of debt, the after-tax cost of debt will be higher at 5%. Calculate the breakpoint of debt, and explain what it means. (4 marks)
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