Question

Go Glass Berhad has a target capital structure that calls for 40 percent debt, 10 percent preferred stock and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for RM9 a share and pays a dividend of RM1 per share; however, the firm will net only RM 8 per share from the sale of new preferred stock. The common stock currently sells for RM4 per share but the firm will net only RM3.40 per share from the sale of new common stock. The firm recently paid a dividend of RM0.20 per share on its common stock and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. The firm expects to retain RM15,000.00 in earnings over the next year.

You are required to:
(i) Estimate the cost of retained earnings.
(ii) Estimate the cost of newly issued common stock.
(iii) Estimate the cost of newly issued preferred stock.

Answer 1

i)

ii)

iii)