Question

Salleh Industries has decided to expand its business and it needs RM5 million. Three
sources of financing are available:
• Issue long-term debt that is currently selling for 103 percent of its par value. The issue matures in 15 years and pays an annual coupon rate of 8 percent. The floatation cost of this issue 5 percent of par and current tax rate is 35 percent.
• Issue RM100 par preferred stock with a 8 percent dividend. The stock is selling in the market for RM96 and has floatation costs equal to 5 percent of the market price.
• Issue common share at a market price of RM5 per share. The firm is expected to pay a dividend of RM0.20 per share and dividend is expected to grow at a rate of 3 percent constantly.

Based on the above information:
a) Calculate the after tax cost of debt, preferred stock and common stock.

b) Which source of financing should the firm choose? Why?