Instructions Answer all questions. Show all necessary workings to receive full marks. Question 1 A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Debt The firm can sell a 10-year, RM1,000 par value, 9 percent bond for RM950. A flotation cost of RM30 would be required in addition to the discount of RM30. Preferred Stock The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay an RM9 annual dividend. The cost of issuing and selling the stock is RM2 per share. Common Stock A firm's common stock is currently selling for RM20 per share. The dividend expected to be paid at the end of the coming year is RM1.80. It is expected that the dividend will grow at the rate of 5.15% indefinitely in the near future. The new common stock issue must be underpriced at RM2 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent. [Total: 20 Marks]