Question 1:

1. Cost oI equity Irom new share : Re D1/(p*(1-I) g

u0 l(lssue cosL) g CosL of equlLy from new share
.185 1.25 15 3 209341
2. Cost oI equity Irom preIerence share: Rp D/ ( P - I)

u u f (lssue cosL) CosL of equlLy from preference share
12 024 2 02 1333
3. Cost oI Debt: Rd ( 1 r )`2 - 1 ( as coupon is paid semi-annually)
PV * ( 1 - I ) _ C/((1r)`t) Par / (( 1r)`n)
v C (10 *) ar l n r 8d
103 10 -1 3.5 16 9832 20631
4. Retained earnings breakpoint 35/5 7
Project budget exceeds 7 (4 million ~ 7) so this Iirm must issue new common
stock at a cost oI 2.9341
CCE/V*ReD/V*Rd*(1-T)P/V*Rp
CC 17.577
CC IRR ~ NPV ~ Should not undertake this project