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%
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