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A company in Johor, R.E.Batt Co. is specializing in manufacturing special battery for hybrid cars. It is considering to build another manufacturing plant costing RM20 million as an expansion to the business as market for electric vehicles is anticipated to grow immensely. The new plant is expected to generate after-tax cash flows of RM5 million in perpetuity.
The tax rate of the firm is currently at 25%. The following information and data are available:
Source of capital RM
Long term debt 5,000,000
Preferred shares 50,000
Common shares 2.350,000
The board member would like to know the weighted average cost of capital (WACC) for R.E.Batt Co.before making their final decision. As the CFO of R.E.Batt Co., prepare the following for presentation in the next Board meeting.
Problem a) Calculate the company's WACC using retained earnings and the capital structure weights shown in the table above.
Problem b) Calculate the company's WACC using new issuance of common shares and the capital structure weights shown in the table above.
Problem c) Comment on the company's overall decision.
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