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Compute the cost for the following sources of financing for PeroLima Berhad. PeroLima has debt outstanding and its pre-tax co

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Answer #1

a.after tax cost of debt =pre tax cost *(1 - tax rate)

=>10%*(1-0.30)

=>7%.

b.

cost of common shares = risk free rate + beta*(market premium)

=>9%+1.20*(5%)

=>15%.

c.

Calculation of WACC:

source amount weight cost weight * cost
equity 170,000 (170,000/200,000)=>0.85 15% 0.85*15%=>12.75%
debt 30,000 (30,000/200,000)=>0.15 7% 0.15*7%=>1.05%
200,000 1 WACC 13.80%

d.Reject the project.

Since the return of project 12% is less than the WACC of 13.80%,the project shall not be proceeded with.

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