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  • Maf603 Pya Coc - July 21

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    WAN MOHAMAD ANAS WAN MOHAMAD
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    This document contains calculations related to cost of capital. It calculates the weighted average cost of capital (WACC) of a company to be 10.955% based on costs of equity, preferred shares, and debt. It also determines that retained earnings are sufficient to finance a proposed capital expenditure project. Additionally, it calculates the after-tax WACC of a project using a 60% equity and 40% debt capital structure to be 8.94%.

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    MAF603 PYA COC - JULY 21

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    This document contains calculations related to cost of capital. It calculates the weighted average cost of capital (WACC) of a company to be 10.955% based on costs of equity, preferred shares, and debt. It also determines that retained earnings are sufficient to finance a proposed capital expenditure project. Additionally, it calculates the after-tax WACC of a project using a 60% equity and 40% debt capital structure to be 8.94%.

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    © All Rights Reserved
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    4 views2 pages

    Maf603 Pya Coc - July 21

    Uploaded by

    WAN MOHAMAD ANAS WAN MOHAMAD
    This document contains calculations related to cost of capital. It calculates the weighted average cost of capital (WACC) of a company to be 10.955% based on costs of equity, preferred shares, and debt. It also determines that retained earnings are sufficient to finance a proposed capital expenditure project. Additionally, it calculates the after-tax WACC of a project using a 60% equity and 40% debt capital structure to be 8.94%.

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    © All Rights Reserved
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    of 2

    July 2021

    A. A.i)

    Year Cash flow 8% PV 12% PV


    1 (920x0.96) = 1.00 (883.20) 1.00 (883.20)
    883.2
    1-5 (1000x8%) = 3.9927 319.42 3.6048 288.384
    80
    5 1040 0.6806 707.824 0.5674 590.096
    NPV 144.04 (4.72)

    Kd before tax = 8% + [144.04/ (144.04- (-4.72) x (12%-8%)]


    = 11.87%

    Kd after tax = 11.87% x (1-0.24)


    =9.02%

    ii) Kp = (7%x100)/[(100x98%)-(100x3%)
    = 7.37%

    iii) Growth rate= (0.1433-0.1365) / 0.1365 = 5%

    Next dividend = 0.1433 x 1.05


    = 0.150465

    Retainded earning = (0.150465/2) + 0.05


    = 12.52%

    iv) Kne = 0.150465/ (2-0.2) + 5%


    = 5.08%

    b)
    Maximum capital expenditure:
    RE available = 80% x RM1.2M = RM960k
    Max capex = 960k/0.6 = RM1,600,000
    Since the cost of project (RM1500,000) is lower that the maximum capital expenditure
    (RM1.6M), the RE is sufficient to finance the project

    Capital structure Weight COC


    Common equity (9m/15m)= 12.52%
    (Ke) 0.6
    Preference share (15000x100/15m)= 7.37%
    (Kp) 0.1
    Debt (Kd) (4.5m x15m)= 9.02%
    0.3
    10.955%

    This study source was downloaded by 100000840926240 from CourseHero.com on 02-02-2022 18:10:56 GMT -06:00

    https://www.coursehero.com/file/124104303/July-2021-cocdocx/
    c) Bond financing = 30% x 1.5m =450,000
    No of bond to be issued = 450k /883.2 = 510 units

    B step 1
    Ba = (Be)(Ve) / [ Ve + Vd(1-Tc)]

    Ba = (0.61) (65) / [ 65 + 35(1-0.24)]

    = 0.4329

    Step 2
    Be = 0.4329 x [60 / (60+40(1-0.24))/ 60]
    = 0.6522

    Step 3
    Ke = 5% + 0.6522 (7%)
    = 0.0957 / 9.57%

    WACC = (9.57% x 0.6) + (8% x 0.4) = 8.94%sss

    This study source was downloaded by 100000840926240 from CourseHero.com on 02-02-2022 18:10:56 GMT -06:00

    https://www.coursehero.com/file/124104303/July-2021-cocdocx/
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