Compute the cost of each of the financing alternatives.

Long Term

a) Optimus Logistic Bhd needs RM2,000,000 for its expansion. The firm is considering

these three (3) sources of financing. Calculate the effective cost of the following


i) Issuing new preferred stocks which pay 8 percent fixed dividend. The firm’s

preferred stock is currently selling for RM98. The net price ofthe security after the

issuance costs is RM94. (Par value of preferred stock is RM100).

(3 marks)

ii) Issuing new common stock at RM86 per share. The firm paid a dividend of

RM5.20 per share last year to its common stock holders and investors. The

dividend is expected to grow at a constant rate of 7 percent in the future. The

floatation cost is 5 percent of the selling price.

(5 marks)

iii) Issuing an 11 percent of RM1,000 parvalue of bond that will mature in twenty (20)

years. The bonds floatation cost is 10 percent of the market value which is

RM920. Given 25 percent tax bracket, compute the cost of each of the financing


(5 marks)

Determine which alternative is the best. Why?

(2 marks)

b) Effective collection procedures will enable a firm to convert its receivables to cash on a

timely basis. Briefly explain the three (3) stages involved in the collection activities that

contribute to efficiency in managing receivables.

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