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General information in relation to East Star Bhd: Capital structure:       RM Ordinary share capital 20,000, 000...

General information in relation to East Star Bhd:

Capital structure:       RM

Ordinary share capital 20,000, 000

Preferred share @RM1.20 10,000, 000

Retained earnings        5,000,000

Bonds         5,000,000

1. Current dividend for East Star Bhd’s ordinary shares is RM1.50 and dividend growth rate is 4%.

2. East Star Bhd is planning to issue new ordinary share at RM8 with a flotation cost of 8%.

3. Preferred share is selling at RM5.00 per share.

3. The company’s bond is paying 8% coupon payment.

4. Corporate tax stood at 25%.

Calculate weighted average cost of capital for East Star Bhd.

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Answer #1

Weighted average cost of capital= weight of equity*cost of equity)+(weight of preferred stock*cost of preferred stock)+(weight of debt*after tax cost of debt)

After tax cost of debt=before tax cost of debt*(1-tax rate)=8%*(1-25%)=6.0%

Total capital structure value=20,000,000+10,000,000+5,000,000+5,000,000=40,000,000

Weight of equity=25,000,000/40,000,000=62.5%

Weight of prefereed stock=10,000,000/40,000,000=25%

Weight of debt =5000000/40,000,000=12.5%

Cost of equity=(D1/P0*(1-flotation cost))+g

D1=D0*(1+g%)=1.5*(1+4%)=1.56

P0=8

flotation cost=8%

growth rate=4%

Cost of equity=(1.56/(8*(1-8%)))+4%

=25.20%

Cost of preferred stock=dividend/share price=1.2/5=24.0%

Weighted average cost of capital=(62.5%*25.2%)+(25%*24.0%)+(12.5%*6%)=22.50%

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