Q. Raheem & Co Company has traced out an attractive project and because company is already highly leveraged, so CFO of the company want to increase the equity proportion in order to achieve the optimal capital structure. Common stock currently sells for Rs 100.00 per share, the company expects to pay Rs 10 dividend (D1) per share this year, and its expected constant growth rate is 5.0%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred.

a.Being the financial advisor of the company, trace out the difference between cost of new stock and cost of retained earnings. By how much would the cost of new stock exceed the cost of retained earnings? (4 Marks)

b.Explain the major factors that affects WACC of any company. (1 Mark)