Mutiyara Berhad is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket.
Mutiyara Berhad can raise debt by selling RM1000 par value, 8% coupon interest rate, 20 years bonds on which annual interest payments will be made. to sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay floatation cost of RM30 per bond.
The firm can sell 8% preferred stock at its RM95 per share par value. The cost of issuing and selling the preferred stock is expected to be RM5 per share. Preferred stock can be sold under these terms.
The firm’s common stock is currently selling for RM90 per share. The firm expects to pay cash dividends of RM7 per share next year. The firm’s dividends have been growing at annual rate of 6%, and this growth expected to continue into the future. The stock must be underpriced by RM7 per share, and the floatation costs are expected to amount to RM5 per share. The firm can sell new common stock under these terms.
When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available RM100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new communication stock as the form of common stock equity financing.