BUSFIN Corporation Ltd. started with its business 20 years ago with $600,000. Currently, it is listed on Singapore Exchange with one million shares outstanding. BUSFIN has a total long- term debt worth $i0 million in the form of corporate bonds. The current market price of BUSFIN's stock is $30 per share. The beta of the stock is 1.35, expected market return is 8%, and risk-free rate is 2%. BUSFIN bond has a yield-to-maturity of 6% per annum, compounded annually. The corporate tax rate is 30%. Answer each of the following parts as an independent scenario (i.e. scenario in part (a) does not carry into part (b), (c), and (d) BUSFIN just paid a dividend of $1.50 and the dividend is expected to grow at 25% for the next three years before it settles at a long-term growth rate of 2%. Is the stock price fairly valued? (a) (10 marks) (b) BUSFIN is considering building a factory. The business analyst estimates the cash flows from the project as below. The new factory has a risk similar to BUSFIN's current operation. The project is estimated to last for 6 years. Should BUSFIN invest in the new factory using NPV and MIRR methods? Cash Flows -500,000 200,000 200,000 200,000 Year 1 2 3 4 200,000 200,000 -200,000 5 6 (15 marks) BUSFIN is proposing to reduce its stock beta to 1.20 without changing its business and total assets. If the proposed change is adopted, the before-tax cost of debt would reduce to 5%. How could BUSFIN achieve this plan? Would you advise BUSFIN to adopt the proposed change? (c) (15 marks) (d) One of the bonds issued by BUSFIN is a 20-year, $1,000 par value bond. The coupon rate is 8% and is paid once a year. Its yield-to-maturity is 6% per annum. What is the appropriate bond price today? What will the price be five years from now if market and firm conditions remain unchanged? BUSFIN Corporation Ltd. started with its business 20 years ago with $600,000. Currently, it is listed on Singapore Exchange with one million shares outstanding. BUSFIN has a total long- term debt worth $i0 million in the form of corporate bonds. The current market price of BUSFIN's stock is $30 per share. The beta of the stock is 1.35, expected market return is 8%, and risk-free rate is 2%. BUSFIN bond has a yield-to-maturity of 6% per annum, compounded annually. The corporate tax rate is 30%. Answer each of the following parts as an independent scenario (i.e. scenario in part (a) does not carry into part (b), (c), and (d) BUSFIN just paid a dividend of $1.50 and the dividend is expected to grow at 25% for the next three years before it settles at a long-term growth rate of 2%. Is the stock price fairly valued? (a) (10 marks) (b) BUSFIN is considering building a factory. The business analyst estimates the cash flows from the project as below. The new factory has a risk similar to BUSFIN's current operation. The project is estimated to last for 6 years. Should BUSFIN invest in the new factory using NPV and MIRR methods? Cash Flows -500,000 200,000 200,000 200,000 Year 1 2 3 4 200,000 200,000 -200,000 5 6 (15 marks) BUSFIN is proposing to reduce its stock beta to 1.20 without changing its business and total assets. If the proposed change is adopted, the before-tax cost of debt would reduce to 5%. How could BUSFIN achieve this plan? Would you advise BUSFIN to adopt the proposed change? (c) (15 marks) (d) One of the bonds issued by BUSFIN is a 20-year, $1,000 par value bond. The coupon rate is 8% and is paid once a year. Its yield-to-maturity is 6% per annum. What is the appropriate bond price today? What will the price be five years from now if market and firm conditions remain unchanged