Question 2 Saga Berhad has determined its optimal structure which is composed of the following sources and target market value proportions. Source of Capital Target Market Proportions (%) Long term debt Preferred stock 10 Common stock equity 70 20 Debt: Saga Berhad can sell a 12-year, RM1,000 par value, 7% bond for RM960. A flotation cost of 2% of the face value would be required in addition to the discount of RM40. Preferred Stock: The firm has determined it can issue preferred stock at RM75 per share par value. The stock will pay a RM10 annual dividend. The cost of issuing and selling the stock is RM3 per share. Common Stock: Saga's common stock is currently selling for RM18 per share. The dividend expected to be paid at the end of the coming year is RM1.74. 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 has a marginal tax rate of 40% Required: a) Calculate the after-tax cost of debt for Saga Berhad. (2 Marks) b) Calculate the cost preferred stock for Saga Berhad. (2 Marks) c) Calculate the cost of retained earnings. (2 Marks) d) Calculate the cost of new common stock. (2 Marks) e) Assuming the firm plans to pay out all of its earings as dividends, calculate the weighted average cost of capital for Saa Berhad. (2 Marks) (Total: 10 Marks)