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
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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 |
b. Calculate the payback period for each project. The maximum allowable payback period set by the company for all projects is 3 years.
c. Calculate the
d. Calculate the profitability index (PI) for each project
e. Calculate the
f. Based on the answer in (b) – (e), explain briefly which project should be accepted.
g. If the project is independent project, how would your answer change in part (f)
Notet: I need only question no. (f)
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