Pacific Natural Sdn Bhd is financed by three sources of funds which are bonds, preference

shares and ordinary shares.

Below are the details of the financing:

$$ The bonds were sold at RM$1,000$ par value, $8$ percent annual coupon, $10$ years bond. An

average discount of RM$30$ per bond was given to compensate for lower coupon interest

rate. The firm also incurred a floatation cost of RM$20$ per bond.

$$ The preference shares were sold at RM$6\mathrm{.}00$ dividend per share, at a price of RM$42$ per

share.

$$ The ordinary shares currently pay a dividend of RM$4\mathrm{.}00$ per share and has a share price

of RM$30.$ The dividend is expected to grow at $6$ percent in future.

Pacific Natural Sdn Bhd has a marginal tax of $35$ percent.

Required:

$($a$)$ Calculate the after tax costs of debt, cost of preference share and cost of ordinary share.

$(10$ marks$)$

$($b$)$ Based on your answer in $($a$)$ above, calculate the weighted average cost of capital

$($WACC$)$ for each of the following financing arrangements:

Financing

Arrangement

Percentage of New Capital Raised

Debt Preference Share Ordinary Share

$1403030$

$2502525$

$(8$ marks$)$

$($c$)$ Which financing arrangement should Pacific Natural Sdn Bhd choose and why.

$(2$ marks$)$