Miss Ain is the newly appointed Finance Manager for KebunBunga Berhad. Her first assignment is to report to the Board of Directors on the company’s current cost of capital. She is presented with the following information:
KebunBunga Berhad Summary of Financial Position For Year Ended 2022
Long-term debt consists of 10% coupon bonds maturing in five years. The face value of the bond is RM1 000 and the yield to maturity is 12%.
KebunBunga Berhad issue perpetual preferred stock at a price of RM47.50 a share. The stock is paying a constant annual dividend of RM3.80 a share.
The market risk-free rate is 6% and the average return on the market is 15%. The company’s equity beta is 1.2.
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Corporate tax is 40% per annum.
From the above information you are required to:
a. determine the:
i. cost of common stocks.
ii. cost of debt.
iii. cost of preferred stocks.
b. based on your calculation in part (a), determine KebunBunga Berhad’s Weighted Average Cost of Capital (WACC).
c. Explain what effect inflation would have on a company’s cost of capital.
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