FundRobot » Equity Funds » Please help me answer - Cost of Capital?

 LinkBack Thread Tools #1 (permalink) Posts: 2,658 please help me answer - cost of capital 2.Mukesh Corporation needs RM8 million for its long-term expansion projects. As the financial manager of the company, you are required to evaluate the costs of the following financing alternatives: a.Issue common stock. The price of the existing shares of the company is RM50. The expected dividend for the next year is RM3.50 and the growth rate will remain at 10%. The flotation cost is 5% of the issue price. b.Issue 8% coupon interest bond of 10 years. The market price of a similar bond is RM1,000. The current tax bracket of the firm is 40%. c.Issue a 15% preferred stock with a par value of RM90. The flotation cost is 3% of the par value and the market price is RM140. Calculate the cost of each alternative and choose the best alternative. 2. You are considering two financing proposals. The first proposal that you are analyzing is a preferred stock that sells for RM100 and pays annual dividend of RM15. The second proposal is a common stock that recently paid a RM6 dividend and the stock is selling for RM50. The rate of growth in earnings for this common stock is 5%. a.Calculate the cost of issuing common stock. b.Calculate the cost of issuing preferred stock. c. Which financing proposal to be accepted and why?   #2 (permalink) Posts: 2,600 please help me answer - cost of capital a)Issue common stock. The price of the existing shares of the company is RM50. The expected dividend for the next year is RM3.50 and the growth rate will remain at 10%. The flotation cost is 5% of the issue price. Ksubc "cost of external equity" = [D1/(P0(1 - F)] + g Ksubc = [3.50 / (50(1 - 0.05)] + 0.10 = (3.50 / 52.63158) + 0.10 = 0.0665 + 0.10 = 0.1665, or 16.65% b. Issue 8% coupon interest bond of 10 years. The market price of a similar bond is RM1,000. The current tax bracket of the firm is 40% market rate = coupon rate since the bond is selling at par of 1,000 after tax rate of debt = 0.08 * (1 - tx) = 0.08 * (1 - 0.40) = 0.048, or 4.8% c. Issue a 15% preferred stock with a par value of RM90. The flotation cost is 3% of the par value and the market price is RM140. dividend on preferred stock = 90 * 0.15 = 13.50 3% of par value: 90 * 0.03 = 2.70
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