Question
Looking-forward Productions is considering a project with an initial start-up cost of RM960,000. The firm maintains a debt-equity ratio of 0.50 and has a flotation
Looking-forward Productions is considering a project with an initial start-up cost of RM960,000. The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8 percent and a flotation cost of equity of 11.4 percent. The firm has sufficient internally generated equity to cover the equity cost of this project.
Required:
What is the initial cost of the project including the flotation costs?
B. Jade Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent. The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of RM19 a share. The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm paid an annual dividend of RM1.10 a share and expects to increase that amount by 2 percent each year.
Required:
Using an average expected cost of equity, what is the weighted average cost of capital?
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