Scribd
Upload
592 views2 pages

Answers COST of CAPITAL Exercises 2

The document provides an example of calculating the weighted average cost of capital (WACC) for a company called Aulia Bhd. It details the capital structure of Aulia Bhd including the market value and costs of debt, common stock, and preferred stock. It then calculates the WACC as 12.58% by taking a weighted average of the cost of each component based on its market value proportion. The document concludes that if Project A has an IRR of 11% and Project B has an IRR of 14%, Project B should be selected since its return exceeds the company's WACC, while Project A's return does not.

Uploaded by

fatehah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
592 views2 pages

Answers COST of CAPITAL Exercises 2

The document provides an example of calculating the weighted average cost of capital (WACC) for a company called Aulia Bhd. It details the capital structure of Aulia Bhd including the market value and costs of debt, common stock, and preferred stock. It then calculates the WACC as 12.58% by taking a weighted average of the cost of each component based on its market value proportion. The document concludes that if Project A has an IRR of 11% and Project B has an IRR of 14%, Project B should be selected since its return exceeds the company's WACC, while Project A's return does not.

Uploaded by

fatehah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

EXERCICES on Cost of Capital:

1. PM Company has the following capital structure stated in book value terms:

Source of Capital RM
Bonds (RM1,000 par, 7% coupon) 4,000,000
Preferred stock (RM20 par) 500,000
Common stock (200,000 shares 200,000
outstanding at RM1 par)

The firm's bonds are currently selling for RM900 per bond, the preferred stock for RM16 per
share, and the common stock for RM19 a share.

i) What is the market value of each source of capital and the current total value of the firm
(total financing needed based on market value)?

Bond $4mill /$1000 = 4,000 bonds; 4,000 bonds x $900 = $3,600,000


Preferred Stock $500,000/$20 = 25,000 shares ; 25,000 shares x $16 = $ 400,000
Common stock 200,000 shares x $19 = $3,800,000
TOTAL = $7,800,000

ii) What is the proportion of debt in this firm’s capital structure?

$3,600,000 / $7,800,000= 46.15%

iii) What is the proportion of preferred stock in this firm’s capital structure?
$400,000 / $7,800,000= 5.13%

iv) What is the proportion of common stock in this firm’s capital structure?
$3,800,000 / $7,800,000= 48.72%
2. Aulia Bhd has the following capital structure:

Debt 5000 bonds that pays 10 percent annual coupon has a before-tax yield
to maturity of 12 percent. The bond currently sell for RM980 with
RM1000 par value.

Commo 60,000 shares outstanding currently selling for RM50 per share. The
n stock company has paid a RM6.50 dividend per share last year and
experiencing 5 percent growth rate in dividends, which it expects to
continue indefinitely.

Preferred 20,000 shares with RM5.00 dividend that sold for RM45 per share.
stock

The corporate tax rate is 24 percent.

i. Calculate the weighted average cost of capital (WACC).

Mkt value (RM) Weight(%) Cost (%) Weight x cost


Bond (980x5000)=4,900,000 55.68 12% (1-0.24)= 9.12 5.08%
C.stock (50 x 60,000) = 3,000,000 34.09 [6.50(1.05)/50]+0.05 = 6.36%
18.65
P.stock (45 x 20,000)= 900,000 10.23 5.00/45 =11.11 1.14%
Total 8,800,000 100 WACC= 12.58%

This means for every $1 Aulia Bhd raises from investors, it must pay its
investors almost $0.1258 @ $0.13 in return.

ii. Given Project A’ internal rate of return (IRR) is 11 percent and project B’ IRR
is 14 percent, which project should be selected? Why? Assume that this two
projects have the same risk as the firm’s.

Should accept project B….. Because the return (14%) is higher than calculated WACC (cost of
12.58%)

You might also like