Ramada operation plans to diversify its financial resources to finance its short and medium growth projects. The outstanding common stocks is around $ 100,000,000. Ramada issued 5-year bond (30,000bonds) at $ 1,200 face value at 6% cost of finance under premium rate of 10%. In addition, the corporation has raised the following financial resources:

	Amount
Bank Borrowing at 5% interest rate	$ 14,000,000
Retained Earnings	$ 32,000,000
New Equity	25% Old Common
Preference shares	$ 18,000,000

To secure a right recipe of finance, the Corp decided to pay $ 18 dividend per preference share of a market value of $ 200 and flotation rate of 4%. With respect to common share, the dividend is $ 14 per share against a value of $ 150 for old and new common shares. The flotation rate of new common shares is 3% and expected growth rate of 4%. Ramada Corporation is operating business in Kuwait which witnesses the situation that EMR = rf = 6%under minimum eta (1). The tax rate is 15%.

Required:

Compute the WACOC of Ramada Corporation.

What would be the expected change in WACOC if the corporation replaces the new equity finance portion by more debt finance in form of bank borrowing under the same ECOBB and zero business profit tax.

Formula:

WACC = RRR (B) (B %) + ECOBB (BB %) + Kpe (Pref %) + ERR (RE) (R.E %) + Kre (comm.F %)

whereas

Cost of debt = RRR (Bond holder) (1 Tax Rate).

ECOBB = 2mD /P (n+1) = (NIR) (2)

Kpe = D / Po Flotation costs = D / Po (1-F)

ERR= RRR = D1 +G/ Po = rf + Risk premium

Kre = D/NP + G = D/Po (1-F) + G