Pacific Capital, an investment holding firm that is publicly listed in New York Stock Exchange (NYSE),...

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Pacific Capital, an investment holding firm that is publicly listed in New York Stock Exchange (NYSE), had a current capital structure as follows: Ordinary shares Long term debt The before-tax cost of debt and corporate tax rate for Pacific Capital are 3.5% and 18% respectively. Pacific Capital does not pay dividends and has a beta of 1.25. The rate of return for the market portfolio is 8.5%. Assume the return for 1-year Treasury bond is 0.5% per annum. (a) (b) 0 $'000 75,000 25,000 (d) Calculate the weighted average cost of capital (WACC) for Pacific Capital. (10 marks) Discuss two (2) approaches to computing cost of equity. Explain your choice of approach when computing Pacific Capital's WACC, highlighting any weaknesses involved. (10 marks) The Board has been deliberating on raising capital to finance the business growth in an unknown sector. A board member suggested that Pacific Capital raise additional capital through debt as the cost of debt is generally lower than the cost of equity. Discuss any concerns you may have on this suggestion. (8 marks) Pacific Capital, after reviewing its plan to enter into an unknown sector, announced the following changes in its capital structure: Changes Raise more capital through the issuance of preference shares Start to pay annual dividend to ordinary shareholders Additional Information Raise a total $25,000,000 with cost of preference share at 5%. Volume-weighted average price of the share for the last 3 months = $0.95 • Expected dividend to be paid out at the end of the year = $0.06 Dividend growth = 1.5% Calculate the new weighted average cost of capital (WACC) for Pacific Capital. (12 marks) Pacific Capital, an investment holding firm that is publicly listed in New York Stock Exchange (NYSE), had a current capital structure as follows: Ordinary shares Long term debt The before-tax cost of debt and corporate tax rate for Pacific Capital are 3.5% and 18% respectively. Pacific Capital does not pay dividends and has a beta of 1.25. The rate of return for the market portfolio is 8.5%. Assume the return for 1-year Treasury bond is 0.5% per annum. (a) (b) 0 $'000 75,000 25,000 (d) Calculate the weighted average cost of capital (WACC) for Pacific Capital. (10 marks) Discuss two (2) approaches to computing cost of equity. Explain your choice of approach when computing Pacific Capital's WACC, highlighting any weaknesses involved. (10 marks) The Board has been deliberating on raising capital to finance the business growth in an unknown sector. A board member suggested that Pacific Capital raise additional capital through debt as the cost of debt is generally lower than the cost of equity. Discuss any concerns you may have on this suggestion. (8 marks) Pacific Capital, after reviewing its plan to enter into an unknown sector, announced the following changes in its capital structure: Changes Raise more capital through the issuance of preference shares Start to pay annual dividend to ordinary shareholders Additional Information Raise a total $25,000,000 with cost of preference share at 5%. Volume-weighted average price of the share for the last 3 months = $0.95 • Expected dividend to be paid out at the end of the year = $0.06 Dividend growth = 1.5% Calculate the new weighted average cost of capital (WACC) for Pacific Capital. (12 marks)

Answer rating: 100% (QA)

a Weighted average cost of capital WACC 859 b The two approaches to computing the cost of equity are following i Capital Asset Pricing Model CAPM ii Gordon Growth Model While calculating the Pacific C... View the full answer