A & Z has to raise RM3 million for its five-year budget. The company is considering the following financing sources to meet its requirement: - Issue new common stock at 1 percent less than the market with the floatation cost of RM2 per share. The latest dividend paid by the company was RM1 per share. The dividend is expected to grow at an annual rate of 5 percent forever. Currently, the share price is trading at RM30 per share. • Issue a bond with a RM1000 par value that pays 7 percent annual interest and matures in 5 years. The bond has a market value of RM958 and a floatation cost is 11 percent of the market value. The corporate tax rate is 25 percent. Next Multiple Choicc # 20 Compute the cost of common stock for A & Z
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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