a) The following Capital structure is extracted from Mirza Corporation Sdn Bhd a multinationalcompanyproducingelectronicgadgets.ThecapitalstructureonJun2022is as followed. The number of common stock outstanding was 40,000 units and value is RM$8,000,000. The preference share valued at RM$2,000,000 and expected dividend payoutis11%.ThepreferredstockparvalueisRM$1.00andcurrentinternaltradingprice is RM1.08. We have taken debenture as loan which amount to RM$6,000,000 and pay 12% as interest rate. The par value of debenture is RM$100 and Market price is RM$90. TheshareofthecompanycurrentlyistradedforRM$25.Thecompanyisexpectedtopay a divided of RM$2 per common share which will grow at 7% forever. The tax bracket for the company is40%. I. Compute the Capital structure and theproportion II. Compute the cost of the capital for Mirza’s Capitalstructure. III. Compute the weighted average cost of capital for the existing capitalstructure.

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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