E&C Corporation has RM150 million worth of common stock on which investors require a 15% rate of return. It has RM30 million in bonds that offer a 7% return.
- Calculate the WACC for E&C Corporation if they are subject to a 35% tax rate.
- Recompute E&Cs' WACC assuming the firm has RM80 million in debt and RM120 million in stock.
- After reviewing part (i) and (ii) above, explain why the WACC calculated in part (ii) may not be the correct answer if the capital structure changes.
Comment on the following statement: The internal rate of return method is superior to the NPV method because we do not need to know the required rate of return in order to calculate it. Do you agree, discuss.
What do you need to know to determine the optimal capital structure for a firm in the trade - off model?
source: Corporate Finance First Semester Examination Academic Session 2011/2012, Master of Business Administration, Universiti Sains malaysia
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