Transporters Limited have had a very good trading period and they would like to extend their business to make use of the favourable trading conditions. They have planned to raise additional finance from various sources as follows:
1. To issue 150,000 ordinary shares (of $10 nominal value) at $15 each.
2. To issue 200,000 13% preference shares ($10 nominal value) at $12 each.
3. To issue 200,000 15% debentures of $100 at $90 each.
4. Finally the plan to raise a medium term loan of $5 million from non-banking financial institution which will be at an interest of 20% p.a.
Required:
(i) Determine the total amount that the company will raise if the plan is realized. (5 Marks)
(ii) Calculate the average cost of the additional finance. (5 Marks)
N.B
1. Assume a corporation tax rate of 50%.
2. Ordinary shareholders are paid a dividend of 10%