The CEO of Aladdin Berhad has asked you as a financial manager to measure the cost of various sources of financing for future investment decisions. The present capital structure of Aladdin Berhad as of 31 December 2020 consists of:

Long-term debt 40%

Preference shares 10%

Ordinary shares 35%

Retained earnings 15%

Long-term debt Aladdin Berhad plans to issue 10-year RM1,000 par value bonds at RM960. The bonds pay an annual interest of 10% per annum. The floatation cost of 2% of the market price would be paid and the bonds will be redeemed at RM1,100.

Preference shares 8% preference shares with a par value of RM100 can be issued at a 3% discount. A floatation cost of 2% of the par value must be paid.

Ordinary shares Aladdin Berhad's ordinary shares (par value RM1) currently sell at RM6 per share. The floatation cost is RM0.50. The company paid a dividend of RM0.40 last year, and the dividend will grow at a constant rate of 7% per year for the foreseeable future.

Currently, Aladdin Berhad has RM2 million of internal funding that can be used to finance profitable investments.

The corporate tax rate is 25%.

b. Determine the maximum amount of capital expenditure if Aladdin Berhad uses only retained earnings for the equity financing.

c. Determine the weighted average cost of capital of Aladdin Berhad if the firm decides to make independent investments project worth:

i. RM2 million

ii. RM5 million 

d. If the management expected an internal rate of return (IRR) of 10%, which project in (c) above should Aladdin Berhad accept? Justify.