Cemerlang company is considering to undertake few projects amounting to RM6 million. As a consultant, you are required to advise on the companys cost of capital. From the information received, the optimum companys capital structure is as follows:

Long-term debt 30%

Preferred Stock 10%

Equity 60%

The companys bonds are currently sell at RM980. The par value of the bond is RM 1000 each. They have 10 years maturity period. There will be a flotation cost of RM20/bond. The bonds will be redeemed after 10 years at a par value.

coupon rate 8%

The 10% preferred stock with a par value of RM100, selling at RM120.

The common stock is currently sell at RM10 each. The company paid dividends of RM1 per share to the common shareholders. The growth rate of the dividend is expected to be at 6% per year. Flotation costs is estimated at 5% of the shares market price.

The companys retained earnings is RM3 million, which is available for next years investment. The corporate tax is at 25%.

INSTRUCTIONS:

Determine the companys :

a. cost of debt

b. cost of preferred stock

c. cost of retained earnings

d. cost of new ordinary shares

e. Determine the maximum amount of capital expenditure that could be undertaken by the company if it does not issue a new common stock.

f. Based on the answer in (e), compute the WACC, if the company decided to undertake the project that cost RM6 million.