question 1

Sofrie academy sdn bhd requires an immediate additional working capital of rm2 million. There are three possible sources:

Sorce 1: a loan from galleria bank at 12% discounted interest. A 15% compensating balance will be required.

Source 2: a loan from berry at a simple interest rate of 10% and a compensanting bakance of 20%. A deposit of rm5000 with the bank exists.

Source 3: issue rm2 million worth of commercial paper. interest charges is 8% and a fee of 3.5% is payable to the dealer.

I) calculate the effective interest rate for each alternative.

Ii) justify the best alternative for sofnie academy sdn bhd

question 2

Zeluxia corporation is looking for fund of rm8 million through the issuance of bonds, preferred stock and common stock. The mixture of the capital is:

Rm2 million bonds

Rm2.5 million preferred stocks

Rm3.5 million common stocks

The company pays a corporate tax rate of 30% and the information on each fund is as follows:

.the bonds with a 10 years reamining to maturity issued at a coupon rate of 9%. The market price sold at a premium rate of 5% and underwriting fees was 5% from the selling price.

.the preferred stocks have a market price of rm110 and pay dividend of rm8.50 and flotation cost of 3%.

.the common stocks with the current market price of rm50.00 per share and will pay a dividend of rm2.81 per share at the end of the year. The firm needa to pay 3% per share to the underwriter to sell for new stock in the market. Meanwhile, the dividend is to grow at a rate of 7% annually forever.

i) calculate the cost of financing for each source.

ii) identify the lowest cost of financing based on your answer in (i)