7. Tanjung Muri's balance sheet dated 31-12-20X7 shows the following details on its capital structure component.

Capital Structure Component

Long Term Debt (Bond)

Preferred Stock

Common Equity

Additional information

Book Value (RM4000)

1.200

800

2,000

The company's common stock currently trades for RM55 per share The common stock's last year dividend was RM2.10 per share The common stock dividend growth rate=9% per year

A floatation cost of 10% would be required to issue new common stock

The company's preferred stock pays a dividend of RM3.30 per share Price of preferred stock = RM100 per share

week of sources of LI

TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE

FACULTY OF ACCOUNTING, FINANCE AND BUSINESS Cost of debt (before tax cost) -10%, Corporate tax = 35% Market return 12%, risk free rate=6%, stock beta = 1.60

(a) Calculate the cost of each capital component

(i) Long term debt (after tax cost)

(ii) Preferred stock

(iii) Equity from retained earnings (Use Dividend Discount Model) (iv) Equity from retained earnings (Use CAPM)

(v) Newly issued common stock (Use Dividend Discount Model)

(b) Determine the weighted average cost of capital (WACC) of the company if it must issue new common stock for its expansion.

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