NASHORA Berhad is considering a project which costs RM2 million and interested in measuring its overall cost of capital. Tax rate charged 40%. One of component's cost of capitals is cost of debt. The firm can raise unlimited amount will be selling RM1,000, 10 percent, 10 year bond on which semiannual interest payment will be made. An average of RM80 per bond would have to be given in selling that bond. For preference share, the firm can pay dividend 11 percent of this share at is RM10 per share par value. Flotation cost of RM0.50 should be included when to sell this share at RM10.10.

 

In ordinary equity, ordinary share for firm is currently selling for RM8.00 per share. Before that, as manager, el-Firas expects to have earnings before interest and taxes during the coming year of RM220,000 and its expected to growth at constant annual rate of 6 percent. The firm has RM250,000 of debt outstanding bearing a coupon interest rate of 8 percent, and it has 100,000 shares of common share outstanding. He is expected to pay dividends to shareholders based on 50 percent out of net income. The share will have to be under priced by RM0.40 per share, and flotation costs are expected to amount to RM0.40 per share. The firm can sell an unlimited amount of new equity under these terms. When measuring cost retained earnings, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expected to have available RM450,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will used new equity as the form of equity financing. (tax rate = 40%)

 

(a)    Calculate after tax cost of debt. (6 marks)

(b)    Calculate cost of preference share. (3 marks)

(c)    Calculate cost of retained earnings. (7 marks)

(d)    Calculate cost of new common share. (4 marks)

(e)    The firm uses the following weights based on target capital structure proportions to calculate its weighted average cost of capital (WACC). What is the firm's WACC? (5 marks)

 

Source of capital                   Weight

Long-term debt                     40%

Preference shares                  15%

Ordinary equity                      45%

     Total                       100%