CMA Study Group

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  • 1.  Question - Please Help!

    Posted 10-10-2019 11:54 AM

    Orion Corp. is a logistics and transportation company. The finance director, John Kochar, is in the process of evaluating a number of proposed capital investment projects. The following information relates to the firm's finances.

    • Some years ago the firm issued 10,000 bonds, each with a face value of $1,000 and paying an annual coupon rate of 9.2%. These bonds are now trading at $1,040 per bond. A coupon payment on these bonds was made yesterday and the bonds mature next year.

    • The firm has no other debt or preferred stock outstanding.

    • The firm has 2,000,000 shares of common stock outstanding. The stock is currently selling for $14.80 per share and the firm is expected to pay a dividend of $1.48 per share next year. The dividend is expected to grow at a constant rate of 4% per year in the foreseeable future.

    • The firm's corporate tax rate is 30%.

    1. Based on the information provided, calculate Orion's weighted average cost of capital. Show your calculations.


    >>Is it wrong to use the Book value weight? And How would you calculate cost of debt?




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    Yajna Fernando
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  • 2.  RE: Question - Please Help!

    Posted 10-11-2019 09:52 AM
    It is wrong to use book value weight if in the problem the market value is provided.

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    Avigael Mejia CPA
    Accountant
    AL JABER TRADING & CONTRACTING CO. WLL
    DOHA
    Qatar
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  • 3.  RE: Question - Please Help!

    Posted 10-11-2019 12:43 PM
    Thank you! Really appreciate it!

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    Yajna Fernando
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  • 4.  RE: Question - Please Help!

    Posted 04-15-2023 09:54 AM

    The question asks about existed cost of capital such as existed bonds and existed common stock, so why we didn't use the historical or current formulas as below:

    Common stock formula is cash dividends / market value for the common stock. However, the question used the follow: Cash dividends / market value + Growth rate

    Please help and support 



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    Ala Albajaly
    Director/Manager
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