Don Co is considering raising some additional

finance but there is disagreement at board level how

best to proceed.

The managing director thinks that the company

should retain control in the hands of the existing and

loyal shareholders. The finance director feels that the

gearing level should be allowed to increase the

benefit from the tax relief allowed on interest.

The existing equity is quoted at RM$4\mathrm{.}20$ cum div with

an interim dividend of RM$0\mathrm{.}16$ due any day. The

company earnings have grown at a fairly steady rate

of $8\%$ over recent years, but expectations are for

growth to be $2\%$ points better in the future.

The company's debt is $4\%$ irredeemable bonds,

which were issued at a $5\%$ discount. The bond is

currently quoted in RM$80$ with the interest having

just been paid. The corporation tax rate is $25\%.$

Required:

Assume Dun Co wants to

retain control in the hands of

the existing shareholders,

how should it seek to raise

the new finance?

What is the cost of equity?

What is the cost of debt?