PLEASE HELP URGENTLY NEED HELP WITH THIS PROBLEM

QUESTION 5

AlmanTech Corporation was founded by Jerry in 5 years ago. The company is developing a new technology that may enhance significantly the speed of the Internet. There has been a debate in the board of directors about the alternative sources to finance R&D investments (RM5 million) and its impact on the market price of AlmanTech Corp. The CEO was reluctant to issue new shares and suggested the company issue long-term bonds instead. Nowadays the company is expanding activities and needs RM50 million; the company has reserve in retained earnings in amount of RM15 million, which will be used for new projects. The CFO argued to issue bonds to finance the rest of RM35 million. Since the bank is in a good financial shape. There would not be any doubt regarding leverage issues; however, he also keeps in mind that in future Alman Tech may need to issue stocks to maintain the proper capital structure. Target capital structure is 35% of debt, 20% preferred stock and the remainder of common stock finance. The company has the following bonds outstanding: par value RM1,000, 7% coupon rate and maturity of 10 years. Market price of bonds is RM1,200; preferred stock is traded at RM12, paying RM0.80 dividend; common stock is traded at RM32, the total equity is RM300,000 and firm dividend payout ratio is 30%, dividend expected to grow at 8%; marginal tax rate is 20%. The net income of the firm is RM20 million.

Required:

a) Calculate AlmanTech the cost of new debt finance for AlmanTech. [Hint: use interpolation method]

b) What is your estimate of the cost of new equity financing raised from the sale of both stocks?

c) Assess WACC company.

d) What will you advise the CEO and shareholders? Analyse either the firm is enough to invest RM5 million for R&D?