Part A 3 marks TERP

# S T
share 60 7.5 450
right issue 15 6 90
75 540

TERP 7.2

Part B Debt Equity

PBIT 49 49 W1 Intereest
Interest -16.4 -3.6
PBT 32.6 45.4 6.4
Tax -9.78 -13.62
PAT 22.82 31.78
Number share 60 75

EPS 0.38 0.42 PE

Share price 6.27 6.98 EPS X PE ratio

Capital gain 1.23 - 0.22

therefore using the

issue proceeds to buy back debt will not be acceptable to the shareholders as their wealth
will have decreased (by approximately $0.22  75m shares = $16.5m).

Part C interest cover current 4.9

interest cover revised 13.61

Current debt/Equity 89%

Revised Debt/equity 20%

Redeeming the bonds with a book value of $80m would significantly reduce the financial
risk of Bar Co. This is shown by the reduction in gearing from 89.3% to 20.5% and the
increase in the interest coverage from 4.9 times to 13.6 times
Part D business risk

business risk , risk faced by operarion of busniness due to nature of business , low profit or , lo

if contribution is high but the PBIT is low , meaning that Fixed cost is high caused the operatio

if fixed cost is low the opeation gearning is low

Financial risk
 PAT 27.3
Orginal 60
0.455

16.48

as their wealth

e the financial
e of business , low profit or , lose even,

ost is high caused the operational gearning is high

 After tax cost of
(a) Calculate the after-tax cost of debt of the 9% bonds. (4 marks)

Year IRR Cf DF DF
0 Market pri -100 1 - 100.00
1-10 interest 6.3 7.72 48.65
10 redeempti 110 0.614 67.53

16.18

7.11%

PBIT/Interest
interest 0.225
PBIT 1

Current Interest cover 4.44

revised interest cover

interest bond 0.36
interst overdraft 0.025
0.385
revised interest cover 2.60 times

PART B II
current
Gearing Debt
Equity 41
Debt zero as long as no long term debt

revised gearing 10%

if overdraft included 11%

 5% 8%
1 - 100.00
6.710 42.27
0.463 50.95

- 6.78
 Ke CAPM RF+B(RM-RF)

KE 12.00%

KP 7.03%

KD bank loan 7.44%

KD loan note 7.44%

DF@
5% 10% PV@5%
0 market price -103.5 1 1 -103.5
1-5 Interest 6.4 4.329 3.791 27.70865
5 Redeemption 110 0.783526166468459 0.620921 86.18788

10.40

7.4%
 BV NV MV MV*NumberCost Cost *MV
share 15 1 6.19 92.85 12.00% 11.142
prefrernce 6 0.75 0.64 5.12 7.03% 0.36
loan note 8 100 103.5 8.28 7.44% 0.61575
bank loan 5 1 1 5 7.44% 0.37183

111.25 12.48958

PV@10% WACC 11.23%

-103.5
24.26104 IRR spreadhseet
68.30135 -103.5
6.4
- 10.94 6.4
6.4
6.4
116.4

7.3%
Before the new Issue of debt

Ke
Last devei 21.8
Previoues 19.38

Groeth 0.03

KE 12%

KD 7%

BV NV MV total MV cost
share 100 1 2.5 250 11.97%
bond 60 100 104 62.4 7%

312.4

WACC
After new isue
5% 6% PV@5%
0 Market pri -100 1 1 -100
1-10 interest 5.6 7.722 7.360 43.24172
10 redemptio 105 0.613913 0.558395 64.46089

7.70
6.0%

BV NV MV total MV cost
share 100 1 2.5 250 11.97%
bond 60 100 104 62.4 7%
new bond 40 100 100 40 6.0%

352.4

WACC
Cost*MV
29.91433
4.368

34.28233

11.0%

PV@10%
-100
41.21649
58.63145

- 0.15

Cost*MV
29.91433
4.368
2.392256

36.67459

10.4%
B
(a) Calculate the market value after-tax weighted average cost of capital of BKB Co,
explaining clearly any assumptions you make. (12 marks)

Cost
KE RF+Beta(RM-RF) 10.0%

KP 8.0%

Convertible bound
Market pri 105
Share price 5

conversion 115.58

5% 10% PV@5%
conversion - 105.00 1 1 - 105.00
interest 4.9 4.329 4.100 21.21
redemptio 115.58 0.783526 0.712986 90.56

6.77

6.46%

mv cost Mv *cost
Share 125 10.0% 12.5
prefernce 6.25 8.0% 0.5
convertible 21 6.46% 1.356716

152.25 14.35672

WACC 9.4%
pital of BKB Co,

PV@10%
- 105.00
20.09
82.41

- 2.50
Part C
Unsystematic risk can be diversified away but even well-diversified portfolios will be
exposed to systematic risk. This is the risk inherent in the market as a whole, which the
shareholder cannot mitigate by holding a diversified investment portfolio.

Portfolio theory is concerned with total risk (systematic and unsystematic). The CAPM
assumes that investors will hold a fully diversified portfolio and therefore ignores
unsystematic risk.

f
 A

Ke 10.300%

IRR
Kd bond
5% 4% PV@5%
0 Market pric -107.14 1 1 -107.14
1-7 Interest 5.6 5.786 6.002 32.40369
7 Redeempti 100 0.710681 0.759918 71.06813

-3.668176

4.40%

BV$million NV MV MV*Number
ordinary s 10 1 7.5 75
bond 14 100 107.14 15.00

90.00

Wacc 9.3%
B)
Ba BE*E/E+D(1-7)

BA 1.02

BE 1.18

KE New Project 12.3%

PV@10%
-107.14
33.61151
75.99178

2.463287

cost MV *cost
10.300% 7.725
4.40% 0.660244

8.385244
 KE 10.90%
loan note
5% 4% PV@5% PV@10%
Market pri -103.5 1 1 -103.5 -103.5
Interest 4.5 5.076 5.242 22.84061 23.58962
Redemptio 106 0.746215 0.790314525730146 79.09883 83.77334

- 1.56 3.86

IRR 4.7%

MV cost MV*cost
All Equity ordinary s 850 10.90% 92.65
Loan note 200 4.7% 9.42452254223449

1050 102.074522542234

WACC book value 9.7%

WACC market value

BV NV MV MV*number
cost MV*cost
ordinary s 200 0.5 5.85 2340 10.90% 255.06
Loan note 200 100 103.5 207 4.7% 9.754381

2547 264.8144

WACC 10.4%
The wealth of shareholders of Grenarp Co has decreased as they have experienced a
capital loss of $0.26 per share ($3.37 – $3.11) compared to the TERP per share. This means
that shareholder wealth has fallen by $0.26  24m shares = $6.24m (excluding issue costs,
or $6.24 + $0.28m issue costs = $6.52m after issue costs)
 (a) Evaluate the effect on the wealth of the shareholders of Grenarp Co of using the net
issue funds to redeem the loan notes. (8 marks)

Million $million $ miilion

# $ T
Share issue 20 3.5 70
right issue 4 2.73 10.92
24 80.92
TERP 3.37

net cash raised after issue cost 10,920,000.000

Nominal value 10000

before tax interest sa 800
After tax saving 560
Total earning 8400

Earning after redeem 8960

number of share 24000

Revised EPS 0.373

PE ration 8.33

Revised share price 3.11

Capital gain - 0.26

means
osts, loss - 6,253.33
add issue cost -280

loss after add issue co- 6,533.33

narp Co of using the net rights
marks)
 (a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value
basis. (8 marks)

Ke 10.1% BV NV MV Mvtotal
ordinary s 23 0.25 4.25 391
KP 8.9% preference 5 1 0.56 2.8
loan note 11 100 95.45 10.4995
Kd bank loan 5.25% bank loan 3 1 1 3
407.2995
Loan notes 5.6%

interest 4.5 WACC

market price 95.45
redemption 100
year 5

5% 6% PV@5% PV@6%
0 market price -95.45 1 1 -95.45 -95.45
1-5 Interest 4.5 4.329 4.212 19.48265 18.95564
5 Redeemption 100 0.783526 0.747258 78.35262 74.72582

2.39 - 1.77

5.6%
market value

cost MV^cost
10.1% 39.50385
8.9% 0.25
5.3% 0.551224
5.6% 0.167227
40.4723

9.9%
Discuss TWO Islamic finance sources which Tin Co could consider as alternatives to a
rights issue or a loan note issue. (6 marks)

mudaraba

in this source of finance , one part provide financial investment and other party provide skill and expertise t run the business

the profit are shared in agreed ratio and losses are taken by provider financial invetsment up to the capital they have invested

other party is usually involved in managing business as they skilled in their work

trade must be conducted in accordance to sharia law ( islamic law) and any activity not allowed under shariah law must not b
Musharaka

in this source of finance , both parties invest financially and it is seen as joint venture or partnership

profit and loss are split in proportionof the investment made both parties and both can take partin management of the busine

again all trade must only be conducted in accordance with sharia law
 Part A I Calculate the theoretical ex rights price per share.

# $ Total
exist 5 5 25
right issue 1 4 4

6 29

TERp 4.83

Part A II and III

Debt Equity
PBIT 1,916 1916.4 W1 finance cost
Finance cost - 475 -315 160.00
PBT 1,441 1601.4
Tax - 317 - 352
PAT 1,124 1,249
number share 2500 3000

Revised EPS 0.45 0.42

Part A IV Share price@pe ratio 5.62 5.20

current debt Equity industry

gearing 56.33% 81.37% 45.05% 60.50%

interest cover 5.07 4.03 6.08 9

capital gain 0.62 0.37

share price is highest in debt proposal which suggest that is better than equity . The equity share price is

the gearing is high in debt as compared to equity which is reasonble but its higher than industry average
expertise t run the business
the best interest cover in equity propsal but still less than industy avegae , debt will offcourse make inter
the capital they have invested

final decision will be based idea that if the company wants more return they should be ready to take mo

under shariah law must not be taken

 steven comment

we see the increased capital gain under debt finance come with big increase in gearing and low interest

funding with equity might be the more prudent option for the shareholder

tin management of the business

 finance cost

n equity . The equity share price is still better the current share price

ut its higher than industry average , which suggests the ovrall risk will be more

ae , debt will offcourse make interest cover worse because it will increase financial risk

n they should be ready to take more risk and if they are happy with less risk they should expected less risk
crease in gearing and low interest cover , this means taking on more financial risk .
B Discuss the circumstances under which it is appropriate to use the current WACC of Tufa
Co in appraising an investment project

its Appropriate to use WACC of tufa in appraisng project if the new project do not change business risk a

business risk will remain same if the project is part core activity of tufa and is not large size as compare
financial risk will remain same if the project is financed using capital structure which is current being used by tufa .

Lower couppon
interest paid on convertible is likely to be lower than for normal loan notes this because the investor als

Self liquidation
convertible will convert in to share if the share price rise sufficently which means we do not have redeem

Improve capital structure if converted the debt will convert to equity giving te company opportunity to

waleed point

the first advantage to tufa co will be that convertible will not require payment of debt is more likely to b

second advantage is that once the debt is converted to equity tufa will be ale to reduce their gearing . Th

third adbantage is that convertible usaully low interest rate and this is because these have option to con
 Ke
cum dividend 7.52
ex dividend 7.07

current dividend 0.449999999999999

last dividend 0.37

Ke Do 0.449999999999999
Po 7.07
Grorth 5.02%
BV NV
Ke 11.7% ordinary s 12 0.5
preference 5 0.5
Kp 8.1% loan note 10 100
bank loan 3 1
Kd bank loan 5.4%

Kd loan note 5.4%

Interest 4.9
redeemption% 5%
market interest 102.34
nominal 100
year 4
DF PV
5%
0 market int -102.34 1 -102.34 1 -102.34
1-4 interest(1-t 4.9 3.546 17.37516 3.465 16.97902
4 Redeempti 105.00 0.823 86.38376 0.792 83.16983
1.42 - 2.19

5.4%

he current WACC of Tufa

do not change business risk and finanvial risk of tufa

2
nd is not large size as compared to tufa current business size . Both of these situation will change tufa bsimess risk
 s current being used by tufa . VE.VD if this structure change , then the financial risk of tufa will change amd wacc can no longer used

s this because the investor als potential capital gain on conversion this will reduce the cash flow to tufa in short term

means we do not have redeem share at the end of the term. This free up fund in tufa for further investment

ng te company opportunity to take on more debt

ment of debt is more likely to be convert into equity and this will improve tufa liquidity position, tufa can then use te money saved in other

ale to reduce their gearing . This means that financial risk of tufa co will reduce , its will als mean that they can take more debt as previoue

ause these have option to convert to equityin the future , this will lets tufa borrow ,money now at low interest rate and reduce their inter
 MV Mvtotal cost MV^cost
7.07 169.68 11.7% 19.85167
0.31 3.1 8.1% 0.25
102.34 10.234 5.4% 0.551924
1 3 5.4% 0.161791
186.014 20.81538

WACC 11.19%

mess risk
md wacc can no longer used

n short term

hen use te money saved in other profitable project to earn more return

y can take more debt as previoues debt is convert to equity

nterest rate and reduce their interest payament liability