QUESTION 3 (25 MARKS)

a. Currently, Busa Berhad has RM50 million in total assets. The firm is considering increasing its fixed assets at the end of the year by RM15 million. The company plans to finance 40% of the expansion with debt and the remaining 60% with equity capital.

Bond financing will be at a 10% rate and will be sold at par value.

The common stock is currently selling at RM50 per share. The floatation cost incurred for issuing common stock will be at RM4 per share. The expected dividend for the coming year is RM3 per share. The dividends are expected to grow at 6% for an indefinite period. The corporate tax rate is 28%. Internal funding available is RM5 million.

Required:

i. Calculate the after tax cost of bonds.

ii. Calculate the cost of internal equity.

iii. Calculate the cost of new common stock.

iv. Calculate the amount and the number of new common stock that must be sold, assuming the existing capital structure is to be maintained, subject to full utilization of retained earnings.

v. Calculate the weighted average cost of capital for an investment level of RM15 million.