Southern Mart operates a very successful chain of sport shop in Malaysia. The company needs to raise funds for its planned expansion into the Northern Part of Malaysia. The firms balance sheet at the close of 2021 appeared as follows:

Cash Accounts Receivable Inventories Net Plant and Equipment Total Assets

RM2,010,000 4,580,000 1,540,000 32,575,000 RM40,705,000

Long-term Debt Common Equity Total Debt and Equity

RM 8,141,000 32,564,000 RM40,705,000

The companys management estimates that the market requires 15 percent return on its common stock, the firms bonds command a yield to maturity of 7.5 percent, and the firm faces a tax rate of 30 percent. At the end of the previous year Northern Marts common stock was selling for a price 1.5 times its book value, and its bonds were trading near their par value.

1. Explain the current capital structure of Southern Mart.
2. Calculate the cost of capital for Southern Mart.
3. If Southern Mart stock price were to fall 0.8 times book value and the cost of equity fell to 12.5 percent, calculate the firms weighted average cost of capital (assume the cost of debt and tax rate do not change).