Question
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 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 at 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%.
Required: a. Determine:
i. The firms cost of debt (after tax)
ii. The firms cost of preferred shares
iii. The firms cost of retained earnings
iv. The firms cost of new ordinary shares
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