COURSE : CORPORATE FINANCIAL MANAGEMENT II CORPORATE FINANCE PRINCIPLES. COURSE CODE : FIN402

QUESTION 4

The CEO of Statue Inc. has asked you to measure the cost of various sources of financing for the purpose of future investments decisions and the firm now considering increasing it noncurrent assets at the end of the year by RM9.5 million.

The firms 7% debentures are currently selling at RM1,111. The par value of these debentures is RM1,000 each. The debentures have 13 years maturity period. Flotation cost is estimated to be at 5.5% of the market price of the debentures and the debentures will be redeemed at RM1,300.

While, for the ordinary shares is currently selling at RM37.40 per share. Statue Inc. has just paid dividends of RM6.60 per share to its ordinary stockholders. The dividends are expected to grow at 4% per annum. Flotation cost is estimated to be RM8.80 per share.

Statue Inc. 9% preference shares, with nominal value of RM1,010, is selling at RM1,440. In addition to that, the firm has RM5.2 million retained earnings available to finance any profitable project investment next year. The corporate tax rate is 27%.

The Statue Inc.s present capital structure has been determined as follows:

Debenture 36%

Preference shares 16%

Retained earnings 48%

Required:

a. Calculate the cost of:

i. after-tax cost of debenture.

ii. internal equity.

iii. external equity.

iv. preference shares