Magenta Power House Berhad wishes to investigate the effect on its cost of capital of the rate at which the company pays

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Magenta Power House Berhad Wishes To Investigate The Effect On Its Cost Of Capital Of The Rate At Which The Company Pays 1 (98.61 KiB) Viewed 43 times

Magenta Power House Berhad wishes to investigate the effect on its cost of capital of the rate at which the company pays taxes. It wishes to maintain a capital structure of 20% debt, 10% preference share, and 70% ordinary share. The cost of financing with retained earning is 14%, while the cost of preference share financing and the before-tax cost of debt financing are 9% and 11% respectively. Required: (1) (ii) Calculate the weighted average cost of capital (WACC) if the tax rates are 40%, 35% and 25% respectively. (6 marks) Describe the relationship between the changes in the rate of taxation and the weighted average cost of capital (WACC) that you have calculated in (b)(i). (1 mark) What is the cost of capital? Explain the role it has in the long-term investment decisions. (4 marks)