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Determine source of financing would recommend

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Reference no: EM132468587

Your company requires RM2.6 million to purchase assets for future development. The board of directors has suggested that you evaluate the following three sources available and forward the recommendation for their approval.

Those choices are:

Question i) Issue preferred shares at RM100 par value but selling at RM105 per share. The company has to pay dividend 8 percent of par. However, the flotation cost is 4.5 percent of the selling price.

Question ii) Issue common shares at RM1 par value. The company is expecting to grow at 5.5 percent per year and is expecting to pay dividend of 4.5 percent. By issuing common shares, the company will not incur any flotation cost.

Question iii) Issue bonds with maturity period of 15 years. The company is willing to pay yearly coupon rate at 12 percent with flotation cost of 3.5 percent of selling price. The bond will be selling at discount that is 6 percent below its par. The company's tax rate is 35 percent.

Question iv) Which source of financing would you recommend?

Reference no: EM132468587

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