QUESTION 2 Cempaka requires RM3,000,000 financing in order to set up a new branch for its business expansion. As a finance manager, you are responsible to calculate the cost of capital in making capital budgeting decision. The firm has the following sources of capital: Sources of funds RM 8% Redeemable Debentures (par value 3,500,000 RM1,000) 10% Preferences stock (par value RM100) Common stock (par value RM100) 2,100,000 8,400,000 The potential financing sources for the new operating segment are as follows: 1. The firm can sell redeemable debentures that will mature at the end of year 15. The debenture is currently selling at RM1,200 each and a flotation cost of 2% is required. 2. The preferred stock can be sold at 10% above par value. The flotation cost is expected to be RM5 per share. 3. The common stockholders received RM0.60 dividends last year and it is expected to grow at the constant rate of 5% per year. The market price of the stock is RM12.50 per share. Due to the broker fees, the firm could only receive RM12.00 on this issuance. 4. The retained earnings represent 20% of the firm's common equity. However, investment purposes, only two third of the retained earnings could be utilized. 5. Given the corporate tax rate is 25%. Required: a. Compute: i. After tax cost of new debentures ii. Cost of new preferred stock iii. Cost of retained earnings iv. Cost of new common stock b. Calculate the firm's weighted average cost of capital. (13 marks) (5 marks) c. Advise why the firm should use weighted average cost of capital instead of individual cost of capital in making investment decision. (3 marks)