Reference no: EM132762962
Question - Show how they compute they are from Cost of Capital, Financial Leverage, Capital Structure problems
Problem 1 - LIGAYA, which has no current debt, has a beta of 0.95 for its ordinary shares. Management is considering a change in the capital structure to 30 percent debt and 70 percent equity. This change would increase the beta on the stock to 1.15, and the after-tax cost of debt will be 7.5 percent. The expected return on equity is 15 percent, and the risk free rate is 6 percent. Tax rate is 30%. Should LIGAYA's management proceed with the capital structure change? Why?
Problem 2 - The management of LIVE has been reviewing the company's financing arrangements. The current financing mix is P750,000 of common stock, P200,000 of preferred stock (P50 par) and P300,000 of debt. LIVE currently pays a common stock cash dividend of P3. The common stock sells for P50, and dividends have been growing at about 10% per year. Debt currently provides a yield to maturity to the investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue of securities will have a flotation cost of approximately 3%. LIVE has retained earnings available for the equity requirement. The company's effective income tax rate is 40%.
Based on this information,
A) Compute the cost of capital for retained earnings?
B) What is the WACC?
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