Corona Trading requires RM800,000 to develop a new production factory in Perlis. The firm is considering...

 

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Corona Trading requires RM800,000 to develop a new production factory in Perlis. The firm is considering the following three (3) financing alternatives: Alternative 1 Issue a 12-year, 10 percent bond selling at RM1,050. The floatation cost is 6 percent of the par value and the current tax bracket of the firm is 40 percent. Alternative 2 Issue preferred shares that pay a 15 percent dividend on a par value of RM100. The current price of the firm's share is RM95 and the cost of issuing these shares are estimated at 14 percent of its current price. Alternative 3 The firm's common stock is selling at RM40. The growth rate is at a constant rate of 8 percent and the firm has just paid a dividend of RM1.50. The floatation cost would be 5 percent of the selling price. Calculate the after-tax cost of: i. Bond ii. Preferred shares Common shares Corona Trading requires RM800,000 to develop a new production factory in Perlis. The firm is considering the following three (3) financing alternatives: Alternative 1 Issue a 12-year, 10 percent bond selling at RM1,050. The floatation cost is 6 percent of the par value and the current tax bracket of the firm is 40 percent. Alternative 2 Issue preferred shares that pay a 15 percent dividend on a par value of RM100. The current price of the firm's share is RM95 and the cost of issuing these shares are estimated at 14 percent of its current price. Alternative 3 The firm's common stock is selling at RM40. The growth rate is at a constant rate of 8 percent and the firm has just paid a dividend of RM1.50. The floatation cost would be 5 percent of the selling price. Calculate the after-tax cost of: i. Bond ii. Preferred shares Common shares

Answer rating: 100% (QA)

To calculate the aftertax cost of each financing alternative we need to consider the cost of each source of financing and the tax implications Lets ca... View the full answer