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Explain the limitation of wacc measurement

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Reference no: EM132596953

An analyst has collected the following information regarding Christopher Co.:

Capital structure

Debt

4,000,000

Common Shares

6,500,000

Preferred Shares

3,500,000

  • The yield to maturity on the company's bonds is 9 percent. The bond price selling a par value RM1,000 for 20 years periods. 
  • The company's last year's dividend was $2.80 for common shares. 
  • The company expects that its dividend will grow at a constant rate of 7 percent a year.
  • The current common share price is $40.
  • The tax rate is 40 percent.
  • The company anticipates that it will need to raise new common share this year and total flotation costs will equal 10 percent of the amount issued.
  • The preferred share is fixed at $1.60 with the market price at $25. Assume the company accounts for flotation costs by adjusting the cost of capital.

Required:

Question (a) Calculate the company's WACC.

Question (b) Discuss the factors that might affect the accuracy of the WACC measurement.

Question (c) Explain the limitation of WACC measurement.

Reference no: EM132596953

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