Essay 06

• A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%, what would be its cost of equity capital with the new capital structure?

• On 18^th May, you purchased RM1000 shares of BuyLo Stock. On 5^thJune, you sold 200 shares of this stock for RM21 a share. You sold an additional 400 shares on 8^th July at a price of RM22.50 a share. The company declared a RM 0.50 per share dividend on 25^th June to holders on record as of Thursday, 10^th July. This dividend is payable on 31^st July. How much dividend income will you receive on 31^st July as a result of your ownership of BuyLo Stock?  

• Rovia industries has 15,000 shares of stock outstanding with a par value of RM1 per share and a market price of RM36 per share. The balance sheet shows RM15,000 in the common stock account, RM315,000 in the capital – in – excess of par account, and RM189,000 in the retained earning account. The firm just announced a 3 – for – 2 stock split. How many shares of stock will be outstanding after the split?

• Explain the trade of and pecking order theory as it relate to capital structure decisions.