Nest Company currently has outstanding bonds that pay RM100 coupon interest and the yield to maturity (YTM) is 12%. Nest believes it could issue new bonds at par that would provide a similar yield to maturity. Meanwhile, Nest can issue perpetual preferred stock at RM37.50 per share. The stock would pay a constant annual dividend of RM2.80 a share.

Required:

1. If its marginal tax rate is 40%, what is Nests after-tax cost of debt? (5 Marks)

2. What is the companys cost of preferred stock, r_p? (5 Marks)

3. What is Nests cost of common equity if the capital structure of Nest is 40% debt and 60% common equity, with no preferred stock? If the WACC is estimated at 9.96

(5 Marks)

4. Discuss the factors that might affect the accuracy of the WACC measurement (5 Marks)

Explain the limitations of WACC measurement.