Jabbar & Sons has following details of its capital structure. Ordinary Share Capital:

There are 50,000 ordinary shares outstanding with trading price of $35 on the stock exchange. The company has paid dividend consistently over the past few years. Expected payouts for next five years is mentioned below as anticipated by market experts. It is also expected that dividend growth rate beyond year 6 will remain steady @10%.

 

    Dividend                      

 US$  

   Year 1  3.0

   Year 2  3.5

   Year 3  3.8

   Year 4  4.2

   Year 5  5.0  

   

Preferred Stock:

10,000 Preferred stocks with listed price of $115 and redemption price of $100. Dividend is payable @9% for next 6 years.

Long term loan:

The Company is also availing a long-term financing facility of US$1.5million @ 8% from a local bank.

 

 

Required:

i. Find weighted average cost of capital (WACC) that Stella Corporation should use for its investment decisions going forward. Applicable tax rate is 30%.               

 

One of the recent investment proposals under consideration generates IRR of 13.5%, advise management if the investment proposal should be accepted provided financing mix for the proposal remains same.

Answer rating: 100% (QA)

SOLUTION To calculate the weighted average cost of capital WACC we need to find the cost of each component of the capital structure and then weight th... View the full answer