Question: please answer a-f not just a-c, atleast short answer for some parts so I understand the big idea QUESTION 2 The management of Citronella Manufacturing

 please answer a-f not just a-c, atleast short answer for someparts so I understand the big idea QUESTION 2 The management of please answer a-f not just a-c, atleast short answer for some parts so I understand the big idea

QUESTION 2 The management of Citronella Manufacturing Berhad (Citronella) is considering to go through a major expansion programme. As an executive in the company's Finance Department, you have been tasked by the Chief Financial Officer of the company, Ms. Hana, to develop an estimate of the company's cost of capital The current capital structure of the company comprises of long term debt, preferred stock and common stock. The CFO has provided you with the following details: 1) The long term debt consists of 20-year, semi-annual payment non-callable bonds with a coupon rate of 8%, issued five years ago. Each bond has a par value of RM 1,000 and currently priced at RM1,196, Citronella does not have short term interest-bearing debt. ii) Citronella's preferred stock pay an annual dividend of RM4 per share. The current price of the preferred stock is RM65.20. iii) Citronella has 4 million units of common stock outstanding. Its current market price is RM28.90. The company's beta is 1.4, the yield on govemment bonds is 3.2%, and the market risk premium is estimated at 7.5%. Its last dividend (2018) was RM0.90. The trend of dividend payment for the last five years are as below: Year 2014 2015 2016 2017 2018 Dividend RM0.60 RM0.70 RM0.75 RM0,85 RM0.90 Citronella's target capital structure is 25% long-term debt, 10% preferred stock, and 65% common stock equity. The applicable income tax rate is 24% Required: a) Calculate cost of debt and cost of preferred stock for Citronella. (5 marks) b) Calculate cost of common stock equity for Citronella, using both constant-growth model approach and Capital Asset Pricing Model (CAPM) approach. (7 marks) c) Determine the company's weighted average cost of capital (WACC) using both approaches calculated in (b) above. (2 marks) 5 d) What would be Citronella's WACC if the company decided to issue new common stock, with flotation cost of RM3 per share and priced at RM0.40 lower than the market? Comment on the difference between the WACC in (e) and this WACC. (4 marks) e) If the required return by investors at the time of issuance of new common stock as in (d) above is 18%, how much should be the issue price per share? (3 marks) 1) One component of the CAPM formula is beta. Beta is used as a relative measure of non diversifiable risk. Discuss the problems of using beta as a measurement of risk. (4 marks) [TOTAL: 25 MARKS)

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!