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TUTORIAL / EXERCISES CHAPTER 9: LONG TERM FINANCING LONG TERM FINANCING EXERCISE: 1 (LONG TERM FINANCING ) Dillon Corporation has asked its financial manager to measure cost of each specific type of capital as well as the weighted average cost of capital (WACC). The firm tax rate is 40% Debt: The firm can sell for RM980 a 10 year, RM1,000 par value bond paying an annual interest of 10 percent . A floatation cost of 3 percent of the par value is required in addition to the discount of RM20 per bond Preferred stock: 8 percent (annual dividend) preferred stock having a par value of RM100 can be sold for RM65. An additional fee of RM2 per share must be paid to the underwriters. Common stock: The firm's common stock is currently selling for RM50 per share The growth of the firm is 7.1 percent and the expected dividend for the coming year is RM4 per share. It is expected that to attract buyers, new common stock must be priced at RM5 per share and the firm must also pay RM3 per share in flotation cost. 1) Calculate the after-tax cost of debt. (3 marks) D) Calculate the cost of preferred stock. (1 mark) Calculate the cost of common stock (3 marks) iv) If the firm agrees that its optimal capital structure should consist of 40 percent debt, 10 percent preferred stock and 50 percent common stock, calculate the company's WACC (2 marks) Should the financing plan be accepted if Internal Rate of Return (IRR) for the company is 13 percent? (1 mark) SOLUTION : 1 (LONG TERM FINANCING ) CHAPTER 10: (FIN 430 Only! CAPITAL STRUCTURE Students are advised to try to do the exercises using the content material given / any related notes or references. The answer/solution will be updated soon given the assumption that the students has already completed the exercises/tutorial