Question 1 Delima manufacturing needs to raise RM2 million as a basic source of long-term funds to
Question:
Question 1 Delima manufacturing needs to raise RM2 million as a basic source of long-term funds to run their business. The firm has the following alternatives: Bond: to sell 20 years bond, 10% coupon rate (with semiannual coupon payment) on par value RM1,000, issued at 6% discount, floatation cost is 1.5% of par and corporate tax rate is 25%. Preferred stock: to issue stock that has a 7.5% annual dividend, floatation cost of 3.5% of RM100 par value and the price of 2.5% above par. Common stock: the current dividend is RM1.50 and the market price is RM56 per share. The annual growth rate of dividend is 7% and the floatation cost is RM2.20. a) Calculate the cost of each alternative of financing. (13m) b) Which alternative should Delima manufacturing choose? Why? (2m)