Mars Berhad is a major producer of sport wear. Mars stock currently sells for RM70 per share; there are 10.5 million shares outstanding. Mars also has debt outstanding with an aggregate book value of RM400 million. The bonds issued by Mars are currently yielding 10% and are trading at 90% of face value. The risk-free rate is 6%, the market risk premium is 9%, and Mars has a beta equal to 1.5. The corporate tax rate is 34%.

(a) Mars is considering expansion of its facilities. Calculate the Security Market Line (SML) to determine the cost of equity capital. (2 Marks)

(b) Compute the weighted average cost of capital for Mars. (10 marks)

(c) The project under consideration requires an outlay of RM1,000,000. The expansion will produce incremental after-tax cash inflows of RM350,000 per year for the next five years. Compute the net present value of the investment, assuming the project has the same risk as Marss other projects. (5 marks)

(d) Flotation costs are 5% of the amount of common stock issued and 2% of the amount of debt issued. Using the same data, compute the weighted average flotation cost for Mars. Then, compute the net present value of the investment when flotation costs are considered to determine whether they should undertake the project. (8 marks)