just want to check, why for Q1 we take the 7% to be rd but for Q4 we take 9% to be Rd ?
like for Q1, i dont know how to tell if we r suppose to take the 10% or 7% as rd
(TOTAL: 20 marks) Question 4 Company FM-Perfect is a corporation with current capital consists of 50% debt and 50% common equity. The company's 9% annual coupon bond is trading at par and its stock has a beta value of 1.5. The government has a 40% flat tax rate on corporations. (a) Given that the risk-free interest rate is 4% and market risk premium is 15%. Applying CAPM and calculate company's current weighted average cost of capital (WACC). (3 marks) (b) If the company changes its capital structure to 60% debt and 40% common equity and the yield to maturity on its bond does not change, what would its WACC be? (5 marks) Based on your calculations above, should the company change to the new capital structure? Briefly explain why. (2 marks) (TOTAL: 10 marks) mponent, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b) Now calculate the cost of common equity from retained earnings using the CAPM method. c) If Skye continues to use the same market value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity? (2) If it expands so rapidly that it must issue new common stock? Self-practice Questions Question: Valcon's target capital structure is 35% debt, 15% preferred stock and 50% common stock. Currently, its common stock is traded at a price of $10 per share. The company has just paid dividends of $1.10 per share. The perpetual common dividend growth rate is constant at 5%. The company's preferred stock is selling at $30 and its required rate of return is 6% in the current market. Flotation costs have been estimated at 6% for common stock and 3% for preferred stock. Valcon has bonds outstanding at 10% coupon rate, but interest rates for bonds of equal risk are currently yielding 7% in the market. Valcon's tax rate is 30%. What is Valcon's weighted average cost of capital (WACC) if it has to issue new preferred stock and new common stock? Question 2 LeXing's common shares are currently trading at $25 per share. The next common share dividend is expected to be $1.80 per share. Annual dividend growth rate is expected to be constant at 5% perpetually. Its outstanding annual-coupon bonds, with par value of $1,000 and coupon rate of 8%, are currently traded at $970. The bonds still have 5 years to maturity. The company has no preferred stock. LeXing's target capital structure is 35% debt and 65% cquity. What is LeXing's WACC? Assume tax rate of 30%
