QUESTION 2

a) Jasmine Enterprise is interested in measuring its overall cost of capital. The weighted average cost of capital (WACC) is to be measured using the following weights; 50 percent debt, 10 percent preferred stock, and 40 percent common stock. The firm is in the 30 percent tax bracket. Current investigation has gathered the following data.

Debt: The firm can raise debt by selling RM1,000-par value, 8% coupon interest rate per annum of 20-year bonds. To sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay flotation costs of RM20 per bond.

Preferred stock: The firm can sell 8% preferred stock at RM95 per share. The par value of preferred stock is RM100 per share. The cost of issuing and selling the preferred stock is expected to be RM5 per share.

Common stock: The firm common stock is currently selling at RM90 per share. The firm expect to pay cash dividends of RM7 per share next year. The firms dividends have been growing at an annual rate of 6 percent, and this growth rate are expected to continue into the future. The flotation costs of issuing common stock are expected to amount to RM6 per share.

Determine overall cost of capital for Jasmine Enterprise.?

(10 Marks)

b) A merger is the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. While Consolidation is the combination of two or more firms to form a completely new corporation. Briefly explains four (4) types of merger or consolidation activities in business. Provide an example for each type of merger.

(10 Marks)