QUESTION 2 (25 MARKS) You're the CEO of a firm, and you're thinking of making a deal to have your company purchase another one. CEOs are in charge of developing strategy and making ultimate M&A decisions. As a CEO, you also interact with your CFOs, who may assist you in identifying acquisition candidates, doing due diligence, arranging finance, and following up on the deal. You believe the price is too excessive, and you will become the CEO of the merged firm. You anticipate a rise in your income and status. (a) Describe the nature of the agency conflict that develops from the aforementioned scenario between owners and managers. (15 marks) (b) Discuss how a conflict of interest relates to ethical issues. (10 marks)QUESTION 4 (25 MARKS) A company has calculated its ideal capital structure, which includes the sources and target market value proportions shown below. Source of Capital Target Market Proportions Long Term Debt 35% Preferred Stock 15% Common Stock 50% Debt: For RM960, the company can sell a 10-year, RM1,000 par value, 6.50 percent bond. In addition to the RM40 discount, a flotation fee of 3% of the face value would be necessary. Preferred Stock: The company has concluded that it can issue preferred stock at a par value of RM75 per share. The stock will pay an annual dividend of RM10. The stock costs RM3 per share to issue and sell. Common Stock: A firm's common stock is currently selling for RM17 per share. The dividend expected to be paid at the end of the coming year is RM1.70. Its dividend payments have been growing at a constant rate for the last four years.Four years ago, the dividend was RM1.50. It is expected that to sell, a new common stock issue must be underpriced RM1 per share in floatation costs. Additionally, the firm's marginal tax rate is 30 percent. Calculate (a) The firm's before-tax and after-tax cost of debt. (5 marks) (b) The firm's cost of preferred stock. (3 marks) (c) The firm's cost of a new issue of common stock (4 marks) (d) The firm's cost of retained earnings (3 marks) (e) The weighted average cost of capital up to the point when retained earnings are exhausted. (4 marks) (f) Explain the impact on preferred stock component and revised weighted average cost of capital if the target market proportion of long-term debt is decreased to 25% while raising the amount of common stock equity to 75%. (6 marks)