Jisoo Berhad (Jisoo) is a construction company that is financed by ordinary shares and convertible bonds. It currently has issued and paid-up capital of 120 million ordinary shares of RM1 each. The shares are currently trading at RM4.30 per share and are expected to appreciate by 4% per annum for the foreseeable future.

Besides, Jisoo has 3 million units of 8% converitble bonds that are currently trading at RM108 for every nominal value of RM100 per unit. The bonds are expected to mature in 10 years and will be converted into 20 ordinary shares for every nominal value of RM100 convertible bond.

The production manager of Jisoo has recently proposed to invest in a new construction project to build an education city with an estimated cost of RM500 million. This project is different from the existing business of Jisoo which is focusing on the construction of private residence. In evaluating this new investment proposal, the finance manager has found a foreign company which their main construction projects are building schools and colleges is having and equity beta of 1.14 and a debt-to-asset ratio of 50%.

Jisoos equity beta is 1.2. The average return from the market is 10% and the return from risk-free securities is 6%. The corporate tax rate is 24%.

Calculate the after-tax cost of the convertible bonds. (

Calculate the existing weighted average cost of capital (WACC) of Jisoo.

Assuming Jisoo uses its retained fund to finance the new project, calculate the new WACC of Jisoo in order to evaluate the new investment proposal.

Evaluate why the WACC obtained in (b) and (c) is different.

Discuss which discount rate is more appropriate to be used for the new investment evaluation.

Calculate the new enterprise value and new value of equity of Jisoo if the proposed investment of RM500 million is financed via debt financing.

Calculate the new enterprise value and new value of equity of Jisoo if the proposed investment of RM500 million is financed via equity financing.