Reference no: EM133058197

Question -

A. Zelom Bhd is going to issue new bonds and equity to raise funds needed for theirlatest projects amounting to RM1,500,000. The total amount of company's debt and equity as 30 June 2021 is RM15 million.

The par value and market value of the 8% bond is RM1,000 and RM920, respectively.The flotation cost to issue additional bond is 4% of the market value. After the maturity period of 5 years, the bond can be redeemed at RM1,040. The existing value of 8%Bond as 30 June 2021 is amounting to RM4,500,000.

Zelom Bhd plans to issue 7% preference shares with a par value of RM100 can be sold at 2% discount and additional fee of 3% of the par value. Until to date 30 June2021, 15,000 units of preference shares has been issued at par value.

On 30 June 2021, the outstanding number of ordinary shares is 7,800,000 units valued at par RM1.00. The shares are currently traded at the stock market at price of RM2.00per share. The flotation cost to issue new common stock is 10% of the market price.

Zelom Bhd has paid dividend per share at a constant growth rate for the threeconsecutive years from the year 2019 (RM0.1300), year 2020 (RM0.1365) and year 2021 (RM0.1433). For next year 2022, the firm proposes to continue paying dividendper share at similar growth rate from the previous year's dividend.

Zelom Bhd has reported retained earnings as of 30 June 2021 amounting to RM1,200,000. The firm decides to use 80% of its retained earnings for re-investment purposes. The corporate tax rate is 24%.

Required -

a. Calculate the individual after-tax cost of:

i. new debt

ii. preference shares

iii. retained earnings

iv. new common stocks

b. Determine the firm's weighted average cost of capital if the projects areundertaken. (Note: The firm's debt and equity value as 30 June 2021 is based on the par value)

c. Suggest to Zelom Bhd on the number of additional bonds to be issued if the firmwishes to undertake the above projects.

B. Anggun Bhd is a company with a capital structure of 40% debt and 60% equity. The company is planning to invest in a new project that is significantly different from itsexisting business operations. Anggun Bhd has identified Jelita Bhd, a company with business operation similar to the proposed new investment. Jelita Bhd's capitalstructure consists of 35% debt and 65% equity. The equity beta of Jelita Bhd is 0.61. The risk-free rate of return is 5% per year and the equity risk premium is 7% per year. Acompany pay tax at a rate of 24% per year. After-tax cost of debt for Anggun Bhd is 8%.

Required -

i. Calculate the project-specific cost of equity for the proposed new investment.

ii. Determine the new weighted average cost of capital for Anggun Bhd.