CONFIDENTIAL Assignment 1 (20%) BA242/JUNE 2024/FIN430

QUESTION 1

a) Explain the difference between an independent project and a mutually exclusive project.

(4 marks)
b) List three (3) examples of long-term financing and briefly explain them.
(6 marks)

QUESTION 2

a) As a financial analyst for Sumbaxx Corporation, Ali is required to analyze two proposed
capital investments. (Project A & Project B)

Year Project A Project B

(RM) (RM)
0 (12,000) (12,000)
1 6,500 4,500
2 6,000 4,500
3 5,000 4,500
4 7,000 4,500

The company's cost of capital is 11% and these projects are mutually exclusive. Calculate
the followings:

i) Payback period for the two projects

(6 marks)

ii) Net Present Value for the two projects

(6 marks)

iii) Internal rate of return for Project B

(4 marks)

iv) Which project should be selected and state your reason.

(2 marks)

b) List two (2) reasons why the payback method is less favorable than the Net Present Value
method in analyzing a firm's capital investment.
(2 marks)

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QUESTION 3

Krapp Corporation is planning to make an investment of RM4,500,000 for three alternative

shopping centers in Kelantan. Each project’s expected cash flow from investment are as
follows:

Yea Mall X Mall Y Mall Z

r
RM RM RM
1 1,244,000 1,200,000 960,000
2 1,144,000 1,200,000 1,800,000
3 1,350,000 1,200,000 1,380,000
4 1,420,000 1,200,000 1,680,000

The company’s cost of capital is 10% and these projects are mutually exclusive.

a) Calculate the following

i) Calculate the payback period for three projects

(7 marks)

ii) Calculate the net present value for three projects

(9 marks)

iii) Which project would be selected and state your reasons.

(2 marks)

b) List two (2) disadvantages of using payback period as a capital budgeting method?
(2 marks)

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QUESTION 4

a) DCT Corporation has decided to expand its business. It needs RM6 million for that purpose.
Three sources of financing are available:

i) Issue common stocks that will pay a dividend of RM3.70 per share. The dividend is
expected to grow at a rate of 8% forever. The current market price for the share is
RM65.
ii) Issue long-term debt that is currently selling for 107% of its face value of RM1,000.
The bond matures in 11 years and pays an annual coupon rate of 7.2%. The tax rate
is 25%.
iii) The firm can issue RM100 par preferred stock with a 13% dividend. The stock is selling
at RM95 and has floatation costs equal to 3% of the market price.

Calculate the after tax cost of:

i) debt
(5 marks)

ii) preferred stock

(4 marks)

iii) common stock

(3 marks)

b) Which source of financing should the firm choose? Why?

(2 marks)

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QUESTION 5
15 marks
You are the senior finance executive of GT Trading Sdn Bhd. The company embarked on a
new business venture, requiring RM12 million worth of investment. GT Trading plans to
maintain 60-10-30 capital structure respectively to debt, preferred stock and common stock.
The sources of capital are as follows:
1. 11-year bond, at RM930 market price with 5% yearly coupon rate and
2.3% floating cost
2. Preferred stock at RM96 market price (RM100 par value) with 4%
dividend and 2% floating cost
3. Common stock at RM12 market price with 6% growth and 3% floating
cost. The last dividend was RM0.30

The company pays 24% corporate tax. Based on the information given, calculate:
a. Cost of the bond after tax
b. Cost of preferred and common stocks
c. Weighted average cost of capital

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 CONFIDENTIAL BA242/JUNE 2024/FIN430

QUESTION 6
SYG Construction plans to fund its new project based on a 30-20-50 capital structure for the
bond, preferred stock and common stock, respectively. The company is to issue a new 19-
year, 9.3%-coupon bond at 7% discount. It has a 3.4% floating cost. The preferred stock is
offered at 3% premium on its RM100 par value, with 7% annual dividend. It has a 4% issuing
cost. The company offers its common stock at RM12.0 and expects a 6% growth next year.
Last dividend was RM0.40. The issuance cost is 4%.
a) Calculate the cost of the bond after tax (23%).
(5 marks)
b) Calculate the cost of the preferred stock.
(4 marks)
c) Calculate the cost of the common stock.
(4 marks)
d) Calculate the weighted average cost of the firm.
(4 marks)
e) If SYG's new project is expected to gain an 11% internal rate of return, should the company
accept the project. Explain your answer
(3 marks)

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QUESTION 7

a). Cash flow on two mutually exclusive projects are as follows:

Year Project J Project B

0 -RM110,000 -RM120,000
1 20,000 0
2 20,000 0
3 40,000 60,000
4 40,000 60,000
5 40,000 60,000

You require 6% return on your investment.

i). If you apply payback criteria, which project will you choose? Why?
(6 marks)

ii). Calculate the NPV and PI for both projects. Which project to choose? Why?
(6 marks)

QUESTION 8
A firm needs to purchase a new machine to meet demand for its product. The cost of the
equipment is RM180,000. It is estimated that the firm will increase operating cash flow by
RM35,000 annually for the next 8 years. The firm has a debt-equity ratio of 2. The firm's cost
of equity is 18% and its pre-tax cost of debt is 9%. The flotation costs of debt and equity are
3% and 9% respectively. Assume the firm's tax rate is 34%.

i) What is the firm's weighted average cost of capital?

(4 marks)
ii) Ignoring floatation costs, what is the NPV of the proposed project?
(3 marks)
iii) What is the weighted average floatation cost (fA) for the firm?
(2 marks)
iv) What is the Ringgit Malaysia floatation cost of the proposed financing?
(3 marks)
v) After considering floatation costs, what is the NPV of the proposed project?
(3 marks)

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QUESTION 9
Cash flows on two mutually exclusive projects are as follows:

Year Project A (RM) Project B (RM)

0 (600 000) (500 000)

1 130 000 200 000

2 130 000 140 000

3 130 000 140 000

4 130 000 140 000

5 400 000 80 000

The company’s cost of capital is 12 per cent. Calculate the projects: -

i). Net Present Value, profitability index, internal rate of return and discounted payback
period. Which project will be more viable?
(10 marks)

ii). What is the crossover rate of the two projects? Briefly explain which project should be
before and beyond the crossover rate.
(5 marks)

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QUESTION 10

a). The Fast8 Company needs RM32 million to build a new plant in Pasir Mas, Kelantan. The
target debt-equity ratio is 1.3. This new plant is expected to generate after-tax cash flows
of RM2.4 million in 27 years . The firm’s cost of equity is 7.5% and its pre-tax cost of debt
is 6.9%. The floatation costs of debt and equity are 3.3% and 4.9% respectively. The
corporate tax rate is 23%.

i). Calculate the weighted average cost of capital for The Fast8 Company.
(3 marks)

ii). Ignoring floatation costs, what is the net present value of the proposed project?

(3 marks)

iii). What is the weighted average floatation cost for the firm?
(2 marks)

iv). What is the amount of the floatation cost of the proposed project?
(3 marks)

v). After considering floatation costs, what is the net present value of the proposed
project?
(3 marks)

b). What is the pure play approach to determining the appropriate discount rate? When
might it be used?
(6 marks)

END OF QUESTION PAPER

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 CONFIDENTIAL BA242/JUNE 2024/FIN430

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