1. The following is the balance sheet of RC Resources Bhd as at Sept 30, 2014.

Balance sheet RM
Ordinary Shares of 25 cents each 250,000
Reserves 350,000
7% preference shares of $1 each 250,000
15% Unsecured loan stock 150,000
Total 1,000,000
The ordinary shares are currently quoted at RM1.25 each, the loan stock is trading at
RM 85 per RM 100 nominal and the preference shares at RM 0.65 each.
Calculate the gearing ratio for RC Resources using:

Gearing Ratio = Preference share + Loan / Equity

(a) Book Value

Book Value = (250,000 + 150,000) / 250,000 + 350,000

= 0.667 @ 66.7%

(b) Market Value

Outstanding Share = Price X Shares Outstanding = $0.25 X ($250,000 / $0.25 share)

=$ 1,250,000
Preference Share = Price X Shares Outstanding = $0.65 X ($250,000 / $1 share)
=$ 162,000
Loan Stock = Price X Unit Loan Stock issues = $85 X ( $150,000/$100) =$ 127,500
Total Firm Value = $ 1,540,000
Gearing ratio = (Preference share + Loan) / equity = (162,500 + 127,500) / 1,250,000
=0.232 @ 23.2%

2. The profit and loss account of Robbie Corp for the year ending June 30, 2014 shows the
following figures:
Income Statement RM
Operating Profit 100,000
Interest Payable 40,000
Profit before Tax 60,000
Corporation Tax 18,000
Profit after tax 42,000
Calculate the interest coverage for Robbie Corp on its borrowings

Interest Coverage = EBIT / Interest payable

= 100,000 / 40,000
=2.5 Times
Therefore Robbie Corporation would have 2.5 times earning ability to pay off the
interest payable.
3. Calculate the operating leverage and financial leverage for year 1 and year 2 based on
the following figures:
Profit/Loss Year 1 (RM) Year 2 (RM) %
Sales 1,000,000 1,100,000 10
Variable Cost (400,000) (440,000)
Fixed Cost (200,000) (200,000)
Operating Profit 40000 460,000 15
(EBIT)
Interest Payment (50,000) (50,000)
Profit before Tax 350,000 410,000 17.1
What does the result of Operating and financial leverage implies based on your answer
above?

Operating leverage can also be measured in terms of change in operating income for a
given change in sales (revenue). Operating leverage is a financial efficiency ratio used to
measure what percentage of total costs are made up of fixed costs to generate profits.

Operating Leverage = Contribution / EBIT = (Selling Price -Variable Cost) / EBIT

Year 1 = (1,000,000 – 400,000) / 400,000
= 1.5 Times
Year 2 = (1,100,000 – 440,000) / 460,000

Financial Leverage = EBIT/PBT = 400,000/ 350,000 =1.14 times year 1

= 1.12 times year 2
Therefore year 1 was still found high financial leverage compare to year 2.

Financial leverage is the degree to which a company uses fixed-income securities such
as debt and preferred equity. The more debt financing company uses, the higher its
financial leverage. A high degree of financial leverage means high interest payments,
which negatively affect the company’s bottom-liner

4. Assume RM 1.00 shares quoted at RM 2.50, dividend just paid of 20 cents. Calculate the
cost of equity.

Dividend Growth Model = (D1/ P0)+g

= 0.20/ 2.50

= 0.08 @ 8%

P0=D1/K-G

Price= 2.50

Dividend paid =D0 = 0.20

Growth rate = Nil

5. Assume cost of equity is 8% or 0.08 cents the dividend just paid of 20 cents. Calculate
the market value per share.

P0 =D1/K-G
Price= 0.2/0.08
= 2.50
Dividend paid =D0 = 0.20
Growth rate = Nil

6. Assume RM1.00 shares quoted at RM 2.50 cum dividend of 20 cents, calculate the cost
of equity.

Dividend Growth Model = (D1/ P0)+g

= 0.20/ 2.50- 0.20

= 0.0869 @ 8.69%

P0=D1/K-G

Price= 2.50

Dividend paid =D0 = 0.20 cum dividend ( newly paid dividend)

Growth rate = Nil

7. Assume the current market price of a share is RM 2.50. A dividend of 20 cents has just
been paid i.e. ex-d. Assuming the expected annual growth rate for the dividend is 5% to
infinity i.e. perpetuity, calculate the cost of equity.

Dividend Growth Model = (D1/ P0)+g

= (0.21/ 2.50) +0.05

= 0.134 @ 13.4%

P0=D1/K-G

Price= 2.50

Dividend paid =D0 = 0.20

 D1 = D0 (1+G) = 0.2 (1+0.05) = 0.21

Growth rate = 0.05

8. Assume the current market price of a share is RM 2.00. A dividend of 20 cents per share
has just been paid. Assuming that the dividend is expected to decline by 2% per annum
in perpetuity. Calculate the cost of equity

Dividend Growth Model = (D1/ P0)+g

= (0.196/ 2.00) - 0.02

= 0.078 @ 7.8%

P0=D1/K-G

Price= 2.00

Dividend paid =D0 = 0.20

D1 = D0 (1+G) = 0.2 (1-0.02) = 0.196

Growth rate = -0.02

9. Using CAPM model, calculate the cost of equity assuming an equity beta of 1.4, an
expected market return of 16% and a risk free rate of 10%

Cost of equity = Ke
1. CAPM model
CAPM = rfr + beta(Rm-rfr)
= 0.1+1.4(0.16-0.1)
= 18.4%
Beta (Rm-rfr)= risk premium
(Rm-rfr) = market risk premium