MHR Berhad

MHR Berhad is an up and growing fast food company and is expanding its business model into food manufacturing. The companys current capital structure are as follows:

Types	Details
Common stocks	The stocks price is RM3.24, and the dividend paid for 2021 was RM0.03 per share, and growth is constant at 4.3%. Outstanding issuance is 2.5 million units was issued at par value of RM2.
Bond	Outstanding issue of bond is 2,000 units, sold at RM900 per unit, annual coupon of 5%, maturity of 20 years.
Business Financing	Outstanding financing was RM2.0 million, which is being paid through monthly instalment of RM28,384 for 10 years.
Mortgage BIMB	Financing of the premise for RM2.8 million, for 25 years on monthly instalment of RM13,322.
Preferred stocks	The preferred stocks of 10,000 units issued at the price of RM92 per unit, with a par value of RM100. The dividend rate is 4.5%.
Vehicles financing	Financing of companys vehicles totalling RM300,000, tenure of 9 years, monthly instalment of RM3,323.

The company is looking into raising new capital, meant to replace the existing bonds as the company is aiming to be listed as Shariah compliance company in the capital market, and to venture into food manufacturing business. The capital is to be raised by issuing 3,000 units of sukuk. The callable sukuk is priced for retail investors at RM875 a piece, with a term of 15 years, semi-annual coupon of 4.8%, and callable at RM1,250. The floatation cost is 1.3%.

Capital Asset Pricing Model (CAPM)

The companys beta is 1.3, whereas the cost of risk-free rate instrument is 2% and the average market cost of borrowing is 7%.

Part of the new capital issuance is to finance a new project. Project details are as follows:

The projects cost is RM5.50 million, with additional working capital requirement of 10% of the project cost. The working capital will be recovered at the termination of the project in Year 6.

Inclusive in the project cost: RM400,000 was spent on purchase of machineries, with additional transportation and fitting cost of RM50,000. The machineries are depreciated based on MACRS, 7-year convention, and will be sold at the termination of the project in Year 6 for RM150,000. (Rate: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93% and 4.46%).

The estimated sales revenue is RM4 million in the first year, to increase at a rate of 5% year on year

The production cost is estimated to be 30% of the sales revenues

The fixed cost is RM500,000 in the first year and is increasing by 3% every year thereafter

The interest expenses are as follows:

Year	1	2	3	4	5	6
Interest expenses (RM)	230,939.95	228,602.61	226,193.45	223,710.27	221,150.79	218,512.68

Corporate tax rate is 24%.

Project appraisal is based on Capital Budgeting Techniques. The cost of capital of the project is based on wacc of the proposed issuance of sukuk.

1c.In the current capital structure, the total weightage of the company's debt is __________. (in decimal or percentage)

2. Assess the companys weighted average cost of capital (wacc) based on the current capital structure.

3. Assess the companys adjusted weighted average cost of capital (wacc) based on the current capital structure.

4. Calculate the annual cost of capital of the proposed sukuk. k d (new) = __________%

5. Based on Capital Asset Pricing Model (CAPM), calculate the expected required rate of return on the company.