11. The Keshari Engineering Ltd has the following capital structure, considered to be optimum, on 31 June 2013. 14% Debt 10% Preference Ordinary equity Total million) 93.75 31.25 375.00 500.00 The company has 15 million shares outstanding. The share is selling for 25 per share and the expected dividend per share is 1.50, which is expected to grow at 10 per cent. The company is contemplating to raise additional funds of 100 million to finance expansion. It can sell new preference shares at a price of *23, less flotation cost of 3 per share. It is expected that a dividend of 22 per share will be paid on preference. The new debt can be issued at 10 per cent rate of interest. The firm pays taxes at rate of 35 per cent and intends to maintain its capital structure. You are required () to calculate the after-tax cost

(a) of new debt,

(b) of new preference capital, and

(c) of ordinary equity, assuming new equity comes only from retained earnings which is just sufficient for the purpose, (ii) to calculate the marginal cost of capital, assuming no new shares are sold, (iii) to compute the maximum amount which can be spent for capital investments before new ordinary shares can be sold, if the retained earnings are 700,000, and (iv) to compute the marginal cost of capital if the firm spends in excess of the amount computed in (ii). The firm can sell ordinary shares at a net price of 22 per share.