RJ Berhad is financed through bonds and ordinary shares. The bonds were issued 5 years ago at a par value of RM100 (total funds raised RM5m). They carry an annual coupon of 10 per cent, are due to be redeemed in 4 years and are currently trading at RM105. The company’s shares have a market value of RM4 million, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. RJ Berhad’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. Should RJ Berhad use the WACC for all future projects and SBUs? Explain your answer.

RJ Berhad is financed through bonds and ordinary shares. The bonds were issued 5 years ago at a par value of RM100 (total funds raised RM5m). They carry an annual coupon of 10 per cent, are due to be redeemed in 4 years and are currently trading at RM105. The company’s shares have a market value of RM4 million, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. RJ Berhad’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. Should RJ Berhad use the WACC for all future projects and SBUs? Explain your answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 15P

See similar textbooks

Similar questions

Michael Berhad is financed through bonds and ordinary shares. The bonds were issued 5 years ago at a par value of RM100 (total funds raised RM5m). They carry an annual coupon of 10 per cent, are due to be redeemed in 4 years and are currently trading at RM105. The company’s shares have a market value of RM4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. Michael Berhad’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. Should Joy Berhad use the WACC for all future projects and SBUs? Explain…
Bradford plc. is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of £100 with a total funds raised 30 million. These bonds carry an annual coupon payment of £10,and are due to be redeemed in four years. Investors currently require a yield of 6% on the bonds. The firm also has 3,000,000 ordinary shares outstanding at the current price of £45.54. Bradford plc. is now reviewing its capital budget for the next year. It has paid a £1 dividend per share over the past several years, and its shareholders expect the dividend to remain constant over the next several years. The company forecasts that it will require £13 million to fund all its profitable projects and its net income will be £12m for the next year i) What is the current capital structure of Bradford plc.? ii) If the firm follows the residual dividend model and maintains its current capital structure, what will be the company’s dividend per share and payout ratio for the next year?…
The Ashford Twins hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The company's noncallable bonds mature in 20 years, have a coupon rate of 8.00% paid annually, a par value of $1,000, and a current market price of $950. (2) The company's tax rate is 21%. (3) The required rate of return on the company's common stock based on CAPM is 9.5%. (4) The target capital structure consists of 40% debt, with the remainder comprised of common equity. What is its WACC? (Ch. 10) Group of answer choices 7.56% 7.84% 6.42% 9.11% 8.40%
A company's capital structure consists of: 1.100,000 bonds,each with a face value of $100 paying a wemi-annual coupon of 6% p.a.,and with 5 years to maturity.These bonds are currently trading at a market yield of 5% p.a. 2.1,000,000 ordinary shares currently trading at $20 each. If the company was calculating its weighted average cost of capital(WACC),the proportion of financing provided by bonds is:
ABC corporation has $600 mil worth bonds outstanding at face value with a 8.5% coupon rate paid semiannually. These bonds were issued six years ago with 25 years to maturity. The market price of these bonds is $952.3, and they were issued with the face value of $1000. The corporate tax rate is 20%. The company also has 6 mil shares of common stock outstanding that currently sell for $30 per share. The stock has beta of 1.2. The risk-free rate is 4%, and the expected return on the market is 10%. The firm is expected to pay $2.25 per share dividend next year. It also forecasts the constant annual dividend growth rate of 4.5% till perpetuity. What is the firm’s weighted average cost of capital (WACC), if the firm calculates the cost of equity by taking average between the results from the DGM and SML models?
MoMahon Ltd currently has $300 million of market value debt outstanding. The 9 percent coupon bonds (semi-annual pay) have a maturity of 15 years and are currently priced at $1,550.04 per bond. The face value of the bond is $1,000. The company also has an issue of 1 million preference shares outstanding with a market price of $24.00. The preference shares offer an annual dividend of $2.40. McMahon Ltd also has 7 million ordinary shares outstanding with a price of $40.00 per share. The company is expected to pay a $4.4 ordinary dividend one year from today, and that dividend is expected to increase by 6 per cent per year forever. If the corporate tax rate is 30 per cent, then what is the company’s weighted average cost of capital (WACC)?
The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9% coupon bonds(semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5% per year forever. If Imaginary is subject to a 40% marginal tax rate, then what is the firm's weighted average cost of capital?
SantiZerLtd currently has $200 million of market value debt outstanding. The 9 per cent coupon bonds (semi-annual pay) have a maturity of 15 years, a face value of $1000 and are currently priced at $1,024.87 per bond. The company also has an issue of 2 million preference shares outstanding with a market price of $20. The preference shares offer an annual dividend of $1.20. Santi Zer also has 14 million ordinary shares outstanding with a price of $20.00 per share. The company is expected to pay a $2.20 ordinary dividend 1 year from today, and that dividend is expected to increase by 7 per cent per year forever. If the corporate tax rate is 40 per cent, then what is the company’s weighted average cost of capital?
ABC Corp has 20,000 shares of bonds outstanding with a coupon rate of 6%, face value of $1,000, and 30 years to maturity. The bonds are selling for 110 percent of par and make semiannual payments. The company also has 600,000 shares outstanding of common stock selling for $67 per share. The beta of the stock is 1.29 and the tax rate is 21%. a. If the Treasury bill rate is 3% and the market risk premium is estimated at 7%., what is ABC’s cost of equity capital? b. What is the WACC? c. ABC Corp plans to expand the current operations. If the project will pay a cash flow of 10,000 next year and then cash flows growing at a rate of 4% over the next 3 years (for a total of 4 of cash flows), what is the most ABC is willing to spend on the initial investment for this project? Please show exceln formulas
Headland Inc. has decided to raise additional capital by issuing $191,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $144,000, and the value of the warrants in the market is $16,000. The bonds sold in the market at issuance for $140,000.(a) What entry should be made at the time of the issuance of the bonds and warrants? b1) Prepare the entry if the warrants were nondetachable
Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. Instructions a. What entry should be made at the time of the issuance of the bonds and warrants? b. If the warrants were nondetachable, would the entries be different? Discuss.
Biden Ltd has an outstanding issue of convertible bonds with a Rs1, 000 par value. These are convertible into 50 shares of common stock. They have a 10 per cent coupon and a 10-year maturity. The interest rate on a straight bond of similar risk is eight per cent. Present Value of 8% for 10 years is 0.463 and Present Value of annuity of 8% for 10 years is 6.710. Biden Ltd has recently changed its management team. At a meeting one of the members of the team questioned the massive investment in the stock market the problems the company may face.As a consultant to the company, you are required to report to the management team on the related risks that Biden Ltd must keep in view.