Tutorial 12 Questions (Chapter 9)

CORPORATE FINANCE (UKFF3013)
JANUARY 2024 TRIMESTER

TUTORIAL12
THE COST OF CAPITAL AND CAPITAL STRUCTURE (CHAPTER 9)
QUESTION 1
Discuss the circumstances under which the weighted average cost of capital (WACC)
can be used as a discount rate in investment appraisal. Briefly indicate alternative
approaches that could be adopted when using the WACC is not appropriate.
QUESTION 2
You are given the following information about ABC Berhad below:
Balance sheet extracts as at January 2021
RM
Ordinary shares (50sen par value) 1,200
Reserves 2,300
7% preference shares (RM100 par value) 8,500
10% debentures (redeemable Jan 2028) 5,750
9% convertible loan stock (convertible Jan 2026) 3,260
Finance leases 500
21,510
Fixed assets 18,890
Current assets 5,850
Current liabilities 3,230
21,510
Additional information:
Current ordinary share price RM4.65 (ex-div)
Past five years’ dividend payments (most 23sen,25sen, 28sen,31sen, 34sen.
recent last)
Current preference share price 52sen (ex-div)
Debenture current market value RM95 (ex-interest)
Convertible loan stock current market value RM95 (ex-interest)
Redemption date of convertible loan stock Jan 2028
Corporation tax rate 31%
It is expected that ABC Berhad’s share price will increase at a rate of 7% per annum
over the next five years. If converted holders of the convertibles receive 20 shares.
Calculate the weighted average cost of capital of ABC Berhad. Showing all your
workings. Clearly explain the reason why any items on the balance sheet have been
excluded from your calculations and clearly state any assumptions you have made.
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TUTORIAL12
QUESTION 3
You are given the following financial position statement information about J Berhad:
RM’000 RM’000
Non-current assets 1,511
Current assets 672
Total assets 2183
Equity finance
Ordinary shares (50sen nominal value) 200
Reserves 150 350
Non-current liabilities
7% preference shares (RM1 nominal value) 300
9% bonds (redeemable after 8 years) 650
9% bank loan 560 1,510
Current liabilities 323
Total liabilities 2,183
You are also given the following information:
Yield on Treasury bills 7%
J Berhad’s equity beta 1.21
Equity risk premium 9.1%
Current ex-dividend ordinary share price RM2.35
Current ex-dividend preference share price 0.66sen
Current ex-interest bond price RM105 per RM100 bond
Corporation tax 30%
Required:
Calculate J Berhad’s WACC using market weights.
QUESTION 4
CHILLI BERHAD has in issue 8 million shares with an ex-dividend market value of
RM7.16 per share. A dividend of 62sen per share for 2013 has just been paid. The
pattern of recent dividends is as follows:
Year 2015 2016 2017 2018

Dividends per share (sen) 55.1 57.9 59.1 62.0
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TUTORIAL12
CHILLI BERHAD also has in issue 8·5% bonds redeemable in five years’ time with a
total nominal value of RM5 million. The market value of each RM100 bond is
RM103.42. Redemption will be at nominal value.
CHILLI BERHAD is planning to invest a significant amount of money into a joint
venture in a new business area. It has identified a proxy company with a similar
business risk to the joint venture. The proxy company has an equity beta of 1·038 and
is financed 75% by equity and 25% by debt, on a market value basis.
The current risk-free rate of return is 4% and the average equity risk premium is 5%.
CHILLI BERHAD pays profit tax at a rate of 30% per year and has an equity beta of
1.6.
Required:
(a) Calculate the cost of equity of CHILLI BERHAD using the dividend growth model.
(b) Discuss whether the dividend growth model or the capital asset pricing model
should be used to calculate the cost of equity.
(c) Calculate the weighted average after-tax cost of capital of CHILLI BERHAD using
a cost of equity of 12%
QUESTION 5
C Berhad is a Malaysian public listed company that operates in the food retail
business. The company's financing structure on the 31st December 2021 is:
RM’000
Ordinary shares, 50sen each 6,000
Reserves 12,000
8% Preference shares, RM1 each 12,000
9 % Bonds (redeemable 2027) 20,000
50,000
Other Information (as at 31st December 2021)

Ordinary share price (ex-div) RM3.17
Preference share price (ex- 0.79sen
div)
10% Bond price RM105
5 years' dividends 9.6sen, 10.9sen, 12.0sen, 13.1sen, 14.5 sen
(Most recent last)
Profit tax 30% per year
Required:
Calculate the current market value-based weighted average cost of capital (WACC)
for C Berhad.
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CORPORATE FINANCE (UKFF3013)

JANUARY 2024 TRIMESTER

Year 2015 2016 2017 2018

Other Information (as at 31st December 2021)

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