Question 2

Rellphone Company Sdn Bhd. faces increasing needs for capital. Fortunately, it has an Aa2 credit rating. The corporate tax rate is 36%. Rellphones treasurer is trying to determine the corporations current weighted average cost of capital in order to assess the profitability of capital budgeting projects. Historically the corporations earnings and dividends per share have increased at about a 6% annual rate.

Rellphones common stock is selling at RM60 per share and the company will pay at RM4.80 per share dividend. The companys RM100 preferred stock has been yielding 9% in the current market. Flotation costs for the company has been estimated by its investment banker to be RM1.50 for preferred stock. The companys optimum capital structure is 40% debt, 10% preferred stock and 50% common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risk to Rellphone.

Data on bond issues

Issue Rams rating Price Yield to Maturity

Utilities:

Bakar G&E 2006. Aa1 RM975.25 8.60%

Chempa Tel. Com Sdn Bhd. Aa2 RM850.75 9.11%

Teong Cellular Sdn Bhd.. A1 RM 960.50 9.67%

Industrial:

General Mill Aaa RM1,050.50 8.50%

May Department Aa3 RM 940.00 11.81%

ICM ... A2 RM1,030.75 9.05%

Compute:

1. Cost of debt.
2. Cost of preferred stock.
3. Cost of common equity.
4. Weighted Average Cost of Capital (WACC).