Note all answers should be in text format with workings & formulas ** No excel in text.

Question 2 (a) Heng Yuan is in process of investing in oil drilling equipment. In their search, they have gathered the following information about two possible equipment A and B. B $100,000 Prob. Initial Investment $100,000 Annual rate of return Retum Prob. Return Pessimistic 11% 0.30 9% Most Likely 18 0.45 18 Optimistic 22 0.25 25 (0) Compute expected rate of return for each equipment. 0.30 0.45 0.25 (4 marks) (1) Compute variance and standard deviation of rate of return for each equipment. (6 marks) (iii) Which project should they purchase? (2 marks) (b) Shasha & Co. has decided to expand its business and it needs RM5 million. Three sources of financing are available: Issue long-term debt that is currently selling for 103% of its par value. The bond matures in 15 years and pays an annual coupon rate of 8%. The floatation cost equals to 5% of the par value. The tax rate is at 35%. The firm issue preferred stock at par with a 14% dividend. The stock is selling in the market for RM96 and floatation cost is 5% of the market price. The company will issue new common stock at RM60 with RM5 floatation cost. The company has just paid a dividend of RM1.20. The dividend is expected to grow at 7% indefinitely You are required to calculate: (i) Before-tax and after-tax cost of debt. (3 marks) (3 marks) (i) Cost of preferred stock. (iii) Cost of common stock. (5 marks) (iv) If the weighted average cost is to be measured by following weight: 40% bond, 10 preferred stock and 50% new common stock, what is the firm's weighted cost of capital? (2 marks) (Total: 25 marks)