4 of 5 QUESTION 3 The finance director of Essential Coeporation is considering how to finance a new investment project that will cost RM 40 million and is expected to last for five years. The retum from the investment is expected to be an equal amount of RM12 million per year throughout the project's lise The corporation's current capital stracture is as follows Ordinary shares Preferred shares Debts 50% 20% 30% Additional information: i. The company's current ordinary share price is RM4.78, and debentures price is RM105000. Interest paid on debentures is 7% annually. Each debenture is redeemable in three years time at its par value of RM1000.00. ii. Issue costs of extemally financed ordinary shares are expected to be 10% of the total raised i. The company's debts consist of medium term floating-rate bank loan and redeemable debentures. iv. Issue costs of new debentures are estimated to be 3.5%. V. Theequity beta of Essential is 1.1S, vi The current dividend per share on ordinary shares is RMO.36 and dividends have grown by approximately 4% per year for the last three years. vi The corporation's preferred share currently sells for RM5 and pays dividend of RMO.25 per share. Issue costs of 3% would be required on newly issued preferred shares. viii. The risk free rate of return is 35% per year and the market return is 11%per year. ix- The corporate tax rate is 30%. Essential Corporation wishes to maintain its current capital structure. x. Required: a) Estimate the weighted average cost of capital of the new investment: i If internal sources of ordinary shares and preferrod preferred shares are used (retained earnings), and debt finance is raised by a 6.5% floating rate bank loan with negligible issue costs (10 marks) ii. If external sources of ordinary shares, preferred shares and debt (new debentures (12 marks) issued) are used. b) Explain two methods of computing the cost of ordinary shares (3 marks) (Total: 25 marks)