NASHORA’s earning per share last year were RM3.50. The common stock sells for RM57.00, last year’s dividend was RM2.50, and flotation cost of RM2 would be required to sell new common stock. Security analysis are projecting that the common dividend will grow at an annual rate of 9%. NASHORA’s preferred stock pays a dividend of RM3.60 per share, and its preferred stock sells for RM30.00 per share with a flotation cost of 5%. The firm can issue long-term debt with a 20-year life, a RM1,000 par value a 10% 3 coupon rate and pay interest semi-annually and sell at RM975. Tax rate is 35%. The market risk premium is 5%, the risk-free rate is 6%, and NASHORA’s beta is 1.65. In its cost of capital calculations, the company only considers the long term; hence, it disregards current liabilities for calculating its WACC.)

A Calculate the cost of capital component, that is, the after-tax cost of debt, the cost preferred stock, the cost of equity from retained earnings, and the cost of newly issued common. (Hint: Use the DCF method to find the cost of common stock and CAPM for retained earnings.))

B (Calculate the Weighted Average Cost of Capital (WACC))

C (Should the company use the WACC as the hurdle rate for each of its projects? Explain.)

D (As a finance manager in public listed firm, discuss three implications of the PeckingOrder Theory in making capital structure decision.)