Global City Berhad $($GCB$)$ decides to invest RM$10$ million in a new $$Bandar Baru Permatang$$ project.

GCB plans to maintain its$$ optimal capital structure as follows:

RM

$5\%$ Corporate Debt $5,000,000$

$7\%$ Preferred Stocks $2,000,000$

Common Stocks $10,000,000$

Retained Earnings $3,000,000$

$20,000,000$

The board of directors has agreed with the proposals to issue the following bond and equity to finance

the project:

$1.$ Issue a corporate debt at a premium of $10\%$ from the par value of RM$1,000.$ The floatation

cost is $5\%$ of the issued value. The corporate debt can be redeemed at a maturity period of

$10$ years at par value.

$2.$ Issue preference shares at a $5\%$ discount on the par value. The flotation cost on new

preference shares is $3\%$ of the issuing price. The nominal value of the preference share is

RM$100.$

$3.$ Issue new common shares which are currently selling at RM$10$ per share. The flotation costs

of $5\%$ will have to be incurred on the market value. GCB will pay a dividend of RM$2\mathrm{.}00$ per

share next year and dividends are expected to grow at a constant rate of $5\%$ per annum for

the foreseeable future.

$4.$ GCB has allocated RM$2,000,000$ of the retained earnings for re$-$investment purposes.

The corporate tax rate is $24\%.$

Required:

a$.$ Calculate the after$-$tax cost of:

i$.$ Corporate debt

ii$.$ Preference shares

iii. Retained earnings

iv$.$ New ordinary shares

$(22$ marks$)$

b$.$ Based on the maximum amount of capital expenditure and full utilization of its retained

earnings, explain whether the retained earnings is sufficient to support the financing

requirement of the project.

$(4$ marks$)$

c$.$ Calculate the weighted average cost of capital if the company wishes to invest in the $$Bandar

Baru Permatang$$ project.

$(6$ marks$)$

d$.$ If GCB intends to undertake the project, calculate the number of:

i$.$ Corporate debt

ii$.$ Preference shares

iii. Ordinary shares to be issued $($assume GCB will fully utilize the retained earnings before

issuing new shares$).$

$(16$ marks$)$

e$.$ If the GCB management expected an internal rate of return $($IRR$)$ of $10\%,$ should GCB accept

the project? Justify.