The percentage of capital structure for ZEF Incorporated is provided here:
Capital structure
Weighted
Bond
21%
Preferred stock
5%
Common stock
74%
The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%.
The common stock market price is RM22.50. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for this year is expected to be RM2.30. To issue the new common stock, company will incur a floatation cost of RM2.50.
ZEF Incorporated is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects—M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is based on answer in question
a) above
Project M (RM)
Project N (RM)
Initial Investment (RM)
28,500
27,000
Year
Cash Flow (RM)
1
10,000
11,000
2
3
9,000
4
8,000
e. Calculate the internal rate of return (IRR) for each project.
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