. The Finance Manager of Royal Myanmar Company believes that the cost of capital of a firm influences firm value and that it is very much related to the capital structure policy of a firm. The capital structure of a firm consists of debt and equity. To determine the cost of capital of the firm, he has collected the following information:

i) The firm's capital structure comprises of 30 percent debt and 70 percent equity.

ii) The firm has bonds outstanding with 20 years to maturity; 12 percent annual coupon rate; face value of $ 1,000; and the current bond price is $ 1,252.

iii) The firm uses Capital Asset Pricing Model (CAPM) to compute the cost of equity with the risk free rate at 2.5 per cent per annum, stock beta of 1.6 and market return of 12% per annum.

iv) The firm pays tax at a rate of 30 per cent.

Required:

(a) Determine the firms after-tax cost of debt. Why is the after-tax cost of debt used in the Computation of cost of debt and not the before-tax cost?

(b) Compute the firms cost of equity and its weighted average cost of capital (WACC) using The table approach