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A firm has determined its optimal capital structure, which is composed of

the following sources and target market value proportions:

Source of Capital

Target

Market

Proportions

Long-term debt

P15 Million

Preference share

2.5

Ordinary share

equity

32.5

Debt:

The firm can sell a 20-year, P1,000 par value, 9 percent bond for

P980. A flotation cost of 2 percent of the face value would be required in

addition to the discount of P20.

Using approximated yield to maturity formula.

Preference share:

The firm has determined it can issue Preference

share at P65 per share par value. The share will pay an P8.00 annual

dividend. The cost of issuing and selling the share is P3 per share.

Ordinary share:

The firm's ordinary share is currently selling for P40 per

share. The dividend expected to be paid at the end of the coming year is

P5.07. Its dividend payments have been growing at a constant rate for

the last five years. Five years ago, the dividend was P3.45. It is expected

that to sell, a new ordinary share issue must be underpriced at P1 per

share and the firm must pay P1 per share in flotation costs. Additionally,

the firm's marginal tax rate is 40 percent.

Calculate the firm's weighted average cost of capital assuming the firm

has exhausted all retained earnings.

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