Illustration $10$

The financial manager of Lily Berhad is responsible to measure the cost of sources of

financing before they plan to invest in a new project next year. The firm's capital structure is

as follows:

The firm plans to sell a $15$ year RM$1,000$ par value bonds at RM$980.$ The bonds pay annual

interest of $9\%$ per annum. A floatation cost of $5\%$ of the current market price would be paid.

$10$ percent preference shares with a par value of RM$100$ can be sold at $5\%$ discount. An

additional fee of $3\%$ of the market price must be paid.

The firm's ordinary share are currently selling at RM$8.$ The floatation cost is $2\%$ of the

current market price. The last year's dividend was RM$0\mathrm{.}60$ and it will grow at $10\%$ per

annum for the foreseeable future.

The corporate tax rate is $28\%.$ Currently, the firm has RM$220,000$ retained earnings that can

be used to finance profitable investments.

Calculate:

a$.$ The after tax cost of;

i$.$ Debt

ii$.$ Preferred shares

iii. Retained earnings

iv$.$ New issue of ordinary shares

b$.$ Determine the maximum capital expenditure if the firm uses internal equity only for

the equity financing.

c$.$ Calculate the WACC for the firm.