The CEO of Aladdin Berhad has asked you as a financial manager to measure the cost of various sources of financing for f
Posted: Wed Jul 06, 2022 6:21 am
The CEO of Aladdin Berhad has asked you as a financial managerto measure the cost of various sources of financing for futureinvestment decisions. The present capital structure of AladdinBerhad 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 parvalue bonds at RM960. The bonds pay an annual interest of 10% perannum. The floatation cost of 2% of the market price would be paidand the bonds will be redeemed at RM1,100.
Preference shares 8% preference shares with a par value of RM100can be issued at a 3% discount. A floatation cost of 2% of the parvalue 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. Thecompany paid a dividend of RM0.40 last year, and the dividend willgrow at a constant rate of 7% per year for the foreseeablefuture.
Currently, Aladdin Berhad has RM2 million of internal fundingthat can be used to finance profitable investments.
The corporate tax rate is 25%.
Required: a. Determine:
i. The firm’s cost of debt (after tax)
ii. The firm’s cost of preferred shares
iii. The firm’s cost of retained earnings
iv. The firm’s cost of new ordinary shares
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 parvalue bonds at RM960. The bonds pay an annual interest of 10% perannum. The floatation cost of 2% of the market price would be paidand the bonds will be redeemed at RM1,100.
Preference shares 8% preference shares with a par value of RM100can be issued at a 3% discount. A floatation cost of 2% of the parvalue 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. Thecompany paid a dividend of RM0.40 last year, and the dividend willgrow at a constant rate of 7% per year for the foreseeablefuture.
Currently, Aladdin Berhad has RM2 million of internal fundingthat can be used to finance profitable investments.
The corporate tax rate is 25%.
Required: a. Determine:
i. The firm’s cost of debt (after tax)
ii. The firm’s cost of preferred shares
iii. The firm’s cost of retained earnings
iv. The firm’s cost of new ordinary shares