Reference no: EM132767874

Question - Mr. Alfred, the Finance Director of MICO Sdn Bhd, is planning to raise funds to fund an acquisition project. He has decided to use the following sources.

1. Issue bonds amounting to $ 2.5 Million with an annual coupon rate of 6.5%.

2. Issue 500000 units of preferred shares for $2 each with a fixed dividend rate of 8%

3. Issue 100000 units of ordinary shares for $5 each. Mr. Alfred expect to pay an annual dividend of 10% to all its ordinary shareholders. Given that the tax rate of the company is 26%.

Required -

a. Calculate the total funds Mr. Alfred wants to raise to fund the acquisition.

b. Calculate the net cost of debt of the bonds issued.

c. Calculate the WACC for the total funds raised by the acquisition.

d. Another Director of the company argued that the company should not raise too much funds through bonds. He proposed to raise the fund using the following sources:

- Borrow $ 3Million from a bank which charge an interest of 8.5%

- Issue 500000 units of Preferred Share for $2 each with a fixed dividend of 10%.

You are required to justify which options of funding is better. Show all your calculations to support your justifications. You have to consider other nonfinancial factors to justify your answer.