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Bestari Berhad is evaluating its cost of capital based on various alternative financing arrangements. It expects...

Bestari Berhad is evaluating its cost of capital based on various alternative financing arrangements. It expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preference share with a RM2 per share dividend at a price of RM30 per share. The ordinary share is currently selling for RM25 a share. It expects to pay a dividend of RM1.50 per share next year. Bestari Berhad expects dividends to grow at a rate of 5% per year and Bestari Berhad tax rate is 40%.

You are required to:

  1. Calculate the cost of debt, cost of preference share and cost of ordinary share.
  2. Based on your answer in (i), calculate the Weighted Average Cost of Capital (WACC) for each of the following financing arrangements:

Financing

Arrangement

Percentage of New Capital Raised

Debt

Preference Share

Ordinary Share

1

30%

10%

60%

2

50%

25%

25%
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