Zola Sdn Bhd wants to develop new product through research and development which requires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why?
Zola Sdn Bhd wants to develop new product through research and development which
requires additional financing of RM2 million. Zola Sdn Bhd is considering selling one
security to raise the needed funds from the following options:
i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The
underwriting fee is 8 percent of market price. The tax rate for the company is 35
percent.
ii. To sell
iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The
company has just paid RM0.80 in dividend and the earnings is expected to grow at 9
percent annually
Calculate the after-tax cost of:
i) Bond
ii) Preferred shares
iii) Common shares
iv) Which source should the firm choose? Why?
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