The percentage of capital structure for ZEF Incorporated is provided here: Capital structure Weighted Bond 21% Preferred stock 5% Common stock 74% The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%. The common stock market price is RM22.50. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for this year is expected to be RM2.30. To issue the new common stock, company will incur a floatation cost of RM2.50. ZEF Incorporated is in the process of choosing the better of
The percentage of capital structure for ZEF Incorporated is provided here:
|
Capital structure |
Weighted |
|
Bond |
21% |
|
|
5% |
|
Common stock |
74% |
The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%.
The common stock market price is RM22.50. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for this year is expected to be RM2.30. To issue the new common stock, company will incur a floatation cost of RM2.50.
ZEF Incorporated is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects—M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is based on answer in question
a) above
|
|
Project M (RM) |
Project N (RM) |
|
Initial Investment (RM) |
28,500 |
27,000 |
|
Year |
Cash Flow (RM) |
|
|
1 |
10,000 |
11,000 |
|
2 |
10,000 |
10,000 |
|
3 |
10,000 |
9,000 |
|
4 |
10,000 |
8,000 |
g. If the project is independent project, how would your answer change in part (f)
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