a) Nura, a new executive at Sky Investments, is required to perform simple analysis of bonds in the bond market. She wants to calculate the theoretical values of the following four (4) bonds. Using the information provided below, calculate the intrinsic value of each bond and provide a short analysis from your findings. Par value for each bond is RM1,000. Hint: the analysis should include the relationship between coupon rate, yield to maturity and bond price (discounted/at par/premium).

	Coupon rate (%)	Coupon frequency	Yield to maturity (i)	Time/Year to maturity (n)	Intrinsic Value/Price (P0)
A1	8	Annually	8	6
B2	8	Semiannually	8	6
C3	8	Annually	10	8
D4	12	Annually	10	10

(10 marks)

b) Jora & Co. is considering a cash purchase of the stock of Morris Corporation. During the year just completed, Morris earned RM4.50 per share and paid cash dividends of RM2.00 per share (D0). Morris earnings and dividends are expected to grow 20 percent per year for the next two years, slowing down to grow at 10 percent per year for another three years, after which they are expected to grow at 5 percent per year for a foreseeable future. Determine the maximum price per share that Jora & Co. should pay for Morris if it has a required rate of return of 12 percent for similar risk characteristic investments.

(10 marks)

QUESTION 2

a) Aurora Enterprise is interested in measuring its overall cost of capital. The weighted average cost of capital (WACC) is to be measured using the following weights; 40 percent debt, 10 percent preferred stock, and 50 percent common stock. The firm is in the 25 percent tax bracket. Current investigation has gathered the following data.

Debt: The firm can raise debt by selling RM1,000-par value, 8% coupon interest rate per annum of 20-year bonds. To sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay flotation costs of RM20 per bond.

Preferred stock: The firm can sell 8% preferred stock at RM95 per share. The par value of preferred stock is RM100 per share. The cost of issuing and selling the preferred stock is expected to be RM5 per share.

Common stock: The firm common stock is currently selling at RM90 per share. The firm expect to pay cash dividends of RM7 per share next year. The firms dividends have been growing at an annual rate of 6 percent, and this growth rate are expected to continue into the future. The flotation costs of issuing common stock are expected to amount to RM6 per share.

Determine overall cost of capital for Aurora Enterprise.

(10 marks)

b) A merger is the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. While Consolidation is the combination of two or more firms to form a completely new corporation. Briefly explains any five (5) specific motives or rationales of merger or consolidation activities in business.

(10 marks)

QUESTION 3

Aspire Corp. is considering investing in the following independent projects provided the projects offer good returns to the corporation. Table below details the initial outlays, the cost of capital, the desired payback period, the projects cash flows, and the internal rate of returns for each project.

	Project MEGA	Project MAYA	Project MAJU
Initial Outlays	RM4,900,000	RM2,400,000	RM900,000
Cost of Capital	9.00%	16.00%	15.00%
Desired Payback Period	3.50 years	3.00 years	4.00 years
Internal Rate of Returns	8.62%	21.16%	17.43%
Cash Flow Year 1	RM1,500,000	RM1,200,000	RM200,000
Cash Flow Year 2	RM1,500,000	RM1,000,000	RM250,000
Cash Flow Year 3	RM1,500,000	RM800,000	RM300,000
Cash Flow Year 4	RM1,500,000	RM600,000	RM350,000
Cash Flow Year 5	-	-	RM400,000

a) Given the above information, analyze the three (3) projects using the commonly used capital budgeting techniques; i) Payback Period, ii) Net Present value, and iii) Internal Rate of Return.

(15 marks)

b) Based on your analysis, rank the projects from the most preferable to the least preferable. Determine the project(s) that is profitable for Aspire Corp. Provide decent justification for your answer.

(5 marks)