MAF603 INDIVIDUAL PROJECT The CEO of Saujana Berhad has asked you as a financial manager to measure the cost of various sources of financing for future investment decisions. The present capital structure of Saujana Berhad as at 31 December 2020 is as follows:

Long term debt 40%

Preference shares 10%

Ordinary shares 35%

Retained earnings 15%

Long term debt Saujana Berhad plans to issue 10-year RM1,000 par value bonds at RM960. The bonds pay an annual interest of 10% per annum. The floatation cost of 2% of the market price would be paid and the bonds will be redeemed at RM1,100.

Preference shares 8% preference shares with a par value of RM100 can be issued at a 3% discount. A floatation cost of 2% of the par value must be paid.

Ordinary shares Saujana Berhads ordinary shares (par value RM1) are currently selling at RM6 per share. The floatation cost is RM0.50. The company paid a dividend of RM0.40 last year and the dividend will grow at a constant rate of 7% per year for the foreseeable future.

Currently, Saujana Berhad has RM120,000 retained earnings that can be used to finance profitable investments.

The corporate tax rate is 25%.

Required:

a. Determine:

i. The firms cost of debt (after tax)

ii. The firms cost of preferred shares

iii. The firms cost of retained earnings

iv. The firms cost of new ordinary shares (17 marks)

b. Determine the maximum amount of capital expenditure if the Saujana Berhad uses only retained earnings for the equity financing. (2 marks)

c. Determine the weighted average cost of capital of Saujana Berhad if the firm decides to make investments in a project worth: i. RM200,000 ii. RM300,000. (6 marks) (Total: 25 marks