Prime International Berhad currently has RM30 million worth of debt, RM45 million of preferred stock, and RM75 million of common stock. They require an additional RM2 million for the expansion of one of their plant Below are the alternatives of financing available for them.

Bond Issue

an 11 percent bond at an 8 percent discount. The bond will mature in 20 years. The cost of underwriting is 10 percent of the market price. The tax rate for the company is 24 percent.

Preferred stock

Issue preferred stock at RM98.00 with 9 percent dividend. The issuing cost is 5 percent of the par value.

Common stock

Issue common stock at RM86.00 per share with 5 percent floatation cost. The shareholders were paid RM5.20 of dividend recently and the dividend is expected to grow at 7 percent annually

REQUIRED:

Based on the alternatives of financing above:

: i. calculate the cost of each financing

ii. supposed the company intends to maintain its current capital structure, calculate the weighted average cost of capital (WACC).

Define the following terms:

i. Debentures

ii. Pre-emptive rights