Question
Lucky Berhad is calculating its cost of capital for use in a capital budgeting decision. The company has 8 million ordinary stocks currently selling at
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Lucky Berhad is calculating its cost of capital for use in a capital budgeting decision. The company has 8 million ordinary stocks currently selling at RM8 per share. The company has just paid a dividend of RM1 per share, and it is expected that the growth rate of this stock is 5 percent.
In addition, the company has 2 million preferred stocks currently selling at RM40 per share. The dividend of the preferred stock is 6 percent per share.
The company is also financed by 50,000 bonds. The company makes 10 percent semi- annual coupon payments. The market price for the bonds is RM1,050 per unit and the bonds will have 30 years to maturity. It is estimated that the bond has an after-tax yield- to-maturity of 7 percent.
The corporate tax rate is 25 percent. Calculate the weighted average cost of capital for Lucky Berhad.
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