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Vitek1552 [10]
1 year ago
12

QUESTION 1

Business
1 answer:
Archy [21]1 year ago
5 0

I)

Weight of equity  is 11.68%

Weight of preferred shares is 25.23%

Weight of debt is 63.08%

II)

Cost of equity is 15.00%

Cost of preference shares  is 10.19%

After-tax cost of debt is 7.20%

III)

WACC is 8.86%

What is capital structure weight?

Capital structure weights mean the proportions of total finance of the company that each different sources of capital contribute to the overall funding of the company.

The first task is to compute the market value of each source of capital

Market value of equity=share price*shares outstanding

Market value of equity=RM$25*40000

Market value of equity=RM$1,000,000

Market value of preference shares= RM$2,000,000*RM$1.08/RM$1.00

Market value of preference shares=RM$2,160,000

Market value of debt= RM$6,000,000*RM$90/RM$100

Market value of debt=RM$5,400,000

Total market value of the company=RM$1,000,000+RM$2,160,000+RM$5,400,000

Total market value of the company=RM$8,560,000

weight of equity=RM$1,000,000/RM$8,560,000

weight of equity=11.68%

weight of preferred shares=RM$2,160,000/RM$8,560,000

weight of preferred shares=25.23%

weight of debt=RM$5,400,000/RM$8,560,000

weight of debt=63.08%

What cost of capital for capital structure mean?

This refers to the after-tax cost of each funding source

The cost of equity can be computed based expected dividend , the share price as well as the dividend growth rate

share price=expected dividend/(r-g)

share price=25

expected dividend=2

r=cost of equity=unknown

g=perpetual dividend growth=7%

25=2/(r-7%)

25*(r-7%)=2

r-7%=2/25

r=(2/25)+7%

r=15.00%

The cost of preferred stock can be determined from the price as well, where the share price is present value of annual dividend based on the present value formula of a perpetuity

share price=annual dividend/r

share price=1.08

annual dividend=11%*1

annual dividend=0.11

r=cost of preferred stock=unknown

1.08=0.11/r

r=0.11/1.08

r=10.19%

The pretax cost of debt is the 12% interest rate

after-tax cost of debt=12%*(1-40%)

after-tax cost of debt=7.20%

What is weighted average cost of capital(WACC)?

WACC is the sum of individual costs of capital source multiplied by their weights in the firm's capital structure

WACC=(cost of equity*weight of equity)+(cost of preferred stock*weight of preferred stock)+(after-tax cost of debt*weight of debt)

WACC=(15.00%*11.68%)+(10.19%*25.23%)+(7.20%*63.08%)

WACC=8.86%

Find out more on WACC on:brainly.com/question/25566972

#SPJ1

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Answer:

Total= 3,120 units

Explanation:

Giving the following information:

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A corporation makes an investment of $20,000 that will provide the following cash flows after the corresponding amounts of time:
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<h3>What is NPV?</h3>

NPV is an abbreviated form of Net present value and computed by deducting the cash outflows from cash inflows at the present value.

Given values:

Cash flow of year 1: $10,000

Cash flow of year 2: $10,000

Cash flow of year 3: $2,000

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Step-1 Computation of PV of cash inflows of every year:

PV of year 1 = Cash inflow of year 1 / (1+ interest rate)^ 1

                    = $10,000 / (1+0.07) ^ 1

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PV of year 2 = Cash inflow of year 1 / (1+ interest rate)^ 2

                    = $10,000 / (1+0.07) ^ 2

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PV of year 3= Cash inflow of year 1 / (1+ interest rate)^ 3

                   = $2,000 / (1+0.07) ^ 2

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Step-2 Computation of total amount of PV of cash inflows:

\rm\ PV \rm\ of \rm\ cash \rm\ inflows = \rm\ PV \rm\  of \rm\  year \rm\  1 + \rm\  PV \rm\ of \rm\ year \rm\ 2 + \rm\ PV \rm\ of \rm\ year \rm\ 3\\\rm\ PV \rm\ of \rm\ cash \rm\ inflows =\$9,346 + \$8,735 + \$1,633\\\rm\ PV \rm\ of \rm\ cash \rm\ inflows =\$19,714

Step-3 Computation of NPV:

\rm\ NPV=\rm\ PV \rm\ of \rm\ cash \rm\ inflows- \rm\ Cost \rm\ of \rm\ investment\\\rm\ NPV=\$19,714-\$20,000\\\rm\ NPV=\$ (286)

Therefore, the NPV comes out to be a negative amount of 286, and hence, the company should not accept the project.

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