Brozierz Ltd, operate in the engineering industry. They feel that some of their older equipment need to be replaced. They seek your help to calculate their cost of capital. Their present capital structure is as follows:

• 300,000 $2 ordinary shares now trading at $2.40 per share.
• 100,000 preference shares trading at $2.50 per share (issued at $3 per share).

10% p.a. fixed rate of interest.

• A bank loan f $500,000 at 12% p.a. (payable in 5 years' time).

Additional information:

• The company's beta is 1.4. A return on market of 15% and a risk free rate of 6%.
• Its current tax rate is 28%.
• Its current dividend is $0.50 per share and they expect their dividend to grow by 7% p.a.

Reguired:

1. Assuming that the company uses the Capital Asset Pricing Model (CAPM) to calculate their cost of equity, calculate their weighted average cost of capital.
2. A further $750,000 is needed to finance the expansion. Which option should they use (from ordinary shares, preference shares or loan financing) and why?