Question
You are trying to evaluate the capital structure of a company with the following information on the company's common stock, preferred stock and bond.
You are trying to evaluate the capital structure of a company with the following information on the company's common stock, preferred stock and bond. The company capital structure consists of 35% common stocks, 20% common stocks and 45% of bond. A new common stock issue paid a RM1.25 dividend last year. The par value of the stock is RM2, and the earnings per share have grown at a rate of 6% per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend/earnings ratio of 40%. The price of this stock is now RM30, but 9% flotation costs are anticipated. Company's preferred stock paying a 7% dividend on a RM125 par value. If a new issue is offered, the company can expect to net RM90 per share. A bond that has a RM1,000 par value (face value) and a coupon interest rate of 13%. A new issue would net the company 90% of the RM1,125 market value. The bonds mature in 20 years, and the firm's average tax rate is 30% and its marginal tax rate is 34%. Compute the followings: (i) Cost of new common stocks. (3 marks) (ii) Cost of preferred stocks. (2 marks) (iii) After-tax Cost of Debt. (4 marks) (iv) Weighted Average Cost of Capital. (2 marks)
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