Subject: Principle of Finance

Chapter: Cost Of Capital

Question 3

NOTE: It will be more appreciated if you show calculation, Thank you

1. Bintang Berhad is determining the optimal capital structure based on the information below:

Long term debt:

The company can issue bonds that have a maturity period of 20 years with a face value of RM1,000. The coupon rate for the bonds is 10% and is sold at the price of RM990. The company estimates that it can issue debt at the rate of 10.15%, and its tax rate is 40%.

Preference Shares:

The preference shares of the company are a 10% dividend on a RM100 par value. If a new issue is offered, the cost of issuing will be 12% and the current price of the share is RM95.

Ordinary Shares:

The ordinary shares of the company are sold at the present price of RM5 per share. The dividend that is expected to be paid at the end of next year is RM0.80. The growth rate of dividends is constant, that is at 6% every year. The company must pay the floatation cost of RM0.20 per share.

A firm has determined its optimal capital structure which is composed of the following sources and percentage of financing.

Capital Resources	Percentage of Financing (%)
Long term debt	30
Preference Shares	15
Ordinary Shares	55

Based on the above information, calculate:

1. After tax cost of debt; (5 marks)

2. cost of preference share; (5 marks)

3. cost of ordinary share; and (5 marks)

4. weighted average cost of capital (WACC). (5 marks)