i)

Bonds : 40,000 x $1,050

: $42,000,000

ii)
N = 10
PMT = 8% = 0.08 x 1,000 = 80
PV= -1050
FV = 1,000
I/Y = 7.28

YTM = 7.28%

RD(1-TC) = 7.28(1-0.4)
= 4.368% or 0.04368

iii)
Preferred Stock: 400,000 x$25
: $10,000,000

iv)
RP = D / P 0
= 2/ 25
= 0.08 or 8%

v)
Common Stock: 2,000,000 x$50
: $100,000,000

vi)
CAPM: RE = Rf + E (E(RM) – Rf)
= 0.05 + 1.2(0.15-0.05)
= 0.17

vii)

Total MV of all securities = 42M + 10M + 100M =152M

Weight of debt = 42M/152M = 0.276
Weight of preferred = 10M/152M =0.0657
Weight of common = 100M/152M = 0.658

WACC = wERE + wDRD(1-TC) + wPRP

= (0.658) (0.17) + (0.276) (0.04368) + (0.0657) (0.08)
= 0.1291 or 12.92%
5.b) Agency Problems

The lower percentage of individual ownership in other countries, such as less concentrated
ownership countries should lead to less agency problems. In these situations, there are more
institutional owners and fewer individual owners, leading to an overall smaller number of
shareholders company. This should reduce the number of differing opinions surrounding
corporate goals and actions. The increase of institutional ownership, particularly with the
expertise that comes with participating in the market as a firm, should lead to a higher degree
of agreement amongst owners and management regarding what is acceptable and what is not
acceptable, especially in terms of risky projects. The increase of institutional ownership in
Malaysia are able to apply more pressure and control over corporations management as they
are large shareholders would lead to lower agency problem