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Berjaya Enterprises is interested in measuring




Question;Berjaya Enterprises is;interested in measuring its overall cost of capital. Current investigation has;gathered the following data. The firm is in the 40% tax bracket.;Debt;The firm can raise;debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on;which annual interest payments will be made. To sell the issue, an average;discount of $30 per bond would have to be given. The firm also must pay;flotation costs of $30 per bond.;Preferred stock;The firm can sell 8%;preferred stock at its $95-per-share par value. The cost of issuing and selling;the preferred stock is expected to be $5 per share. Preferred stock can be sold;under these terms.;Common stock;The firm?s common;stock is currently selling for $90 per share. The firm expects to pay cash;dividends of $7 per share next year. The firm?s dividends have been growing at;an annual rate of 6%, and this growth is expected to continue into the future.;The stock must be underpriced by $7 per share, and flotation costs are expected;to amount to $5 per share. The firm can sell new common stock under these;terms.;Retained earnings;When measuring;this cost, the firm does not concern itself with the tax bracket or brokerage;fees of owners. It expects to have available $100,000 of retained earnings in;the coming year, once these retained earnings are exhausted, the firm will use;new common stock as the form of common stock equity financing.;1.;Calculate the;after-tax cost of debt.;2.;Calculate the cost of;preferred stock.;3.;Calculate the cost of;common stock.;4.;Calculate the firm?s;weighted average cost of capital using the capital structure weights shown in;the following table. (Round answer to the nearest 0.1%.);Source of capital;Weight;Long-term debt;30%;Preferred stock;20%;Common stock equity;50%;Total;100%


Paper#51376 | Written in 18-Jul-2015

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