Bronics Ltd. is a manufacturing company. As the financial manager, you wish to measure the company's...
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Bronics Ltd. is a manufacturing company. As the financial manager, you wish to measure the company's overall cost of capital. After gathering relevant data, your assistant has provided you with the following information: • The company is in the 40% tax bracket. The company's capital structure proportions are: Long-term debt Preferred stock Common stock equity 35% 20% 45% 100% • The company has issued debt by selling RM1,000 par value, 11% coupon interest rate, 10 year bonds on which annual interest payments are made. The company is also charged a floatation cost of RM30 per bond. • The company's common stock currently sells for RM75 per share and expects to pay dividends of RM6 per share next year. The dividends have been growing at an annual rate of 6% which is expected to continue in the future. The floatation cost is RM5 per share. The company also sells 10% (annual dividend) preferred stock at its RM100 per share par value. The cost of issuing and selling the preferred stock is RM3 per share. Required: (a) Calculate the individual cost of each source of financing. (9 marks) (b) Calculate the company's weighted average cost of capital (WACC). (4 marks) (c) Explain the financing decision. Is it possible to increase shareholder wealth by changing the capital with suitable examples. (12 marks), structure? Illustrate your answer Bronics Ltd. is a manufacturing company. As the financial manager, you wish to measure the company's overall cost of capital. After gathering relevant data, your assistant has provided you with the following information: • The company is in the 40% tax bracket. The company's capital structure proportions are: Long-term debt Preferred stock Common stock equity 35% 20% 45% 100% • The company has issued debt by selling RM1,000 par value, 11% coupon interest rate, 10 year bonds on which annual interest payments are made. The company is also charged a floatation cost of RM30 per bond. • The company's common stock currently sells for RM75 per share and expects to pay dividends of RM6 per share next year. The dividends have been growing at an annual rate of 6% which is expected to continue in the future. The floatation cost is RM5 per share. The company also sells 10% (annual dividend) preferred stock at its RM100 per share par value. The cost of issuing and selling the preferred stock is RM3 per share. Required: (a) Calculate the individual cost of each source of financing. (9 marks) (b) Calculate the company's weighted average cost of capital (WACC). (4 marks) (c) Explain the financing decision. Is it possible to increase shareholder wealth by changing the capital with suitable examples. (12 marks), structure? Illustrate your answer
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