Question
B. Twinkle Design Bhd (Twinkle) is an interior designer company and currently is planning to embark into manufacturing miniature building replicas. Total capital of
B. Twinkle Design Bhd (Twinkle) is an interior designer company and currently is planning to embark into manufacturing miniature building replicas. Total capital of Twinkle is RM2,500,000. 20% of the capital is from the issuance of Bonds. The beta value of this company is 1.2. After-tax cost of debt for this company is 8%. The board of directors of Twinkle will approve this project if the cost of the project does not exceed the expected return from the project, which is estimated at 17%. MiniCas Bhd has been identified as the proxy company with equity beta value of 1.5. A quarter of Minicas capital comprises of debts, valued at RM500,000. The rate of return of a risk-free asset is expected to be 5%. The average return on the market is 12%, while the market risk premium is 7%. The corporate tax rate is 25%. Required: Advise the board of directors whether Twinkle should approve or reject this project. (Support your answer with calculation.) (6 marks)
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