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Zola Sdn Bhd wants to develop new product through research and development which requires additional financing of RM2 million. Zola Sdn Bhd is considering selling

Zola Sdn Bhd wants to develop new product through research and development which requires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond

(4 marks)

ii) Preferred shares

(2 marks)

iii) Common shares

(2 marks)

iv) Which source should the firm choose? Why?

(2 marks)

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