NF Power Berhad (NFB) is a listed firm in utility industry since its initial public offering in 2001. The key businesses include power generation and retail, electricity transmission, water supply and wastewater services. With two power plants in Malaysia as well as operations in Thailand and Indonesia, NFB is a major player in the regions power generation and retail industry. As of 30 June 2021, NFB had a market capitalisation of RM5.8 billion.

(a) As environmental issues increasingly affect the economy, NFB is committed to its investment strategies which are carried out in a sustainable manner. Driven by this commitment, NFB plans to expedite the identification and repair of leaking valves in all power stations. The expedition known as NFE are expected to provide greater efficiency and reduce the amount of water being consumed by almost 50 percent after the completion of NFE in three years. The upfront cost for NFE is estimated to be RM5 million. The engagement of NFE is expected to increase the production cost savings by RM1.5 million for the first year, RM3.3 million the second year, and RM4.8 million the final year. The overall weighted average cost of capital (WACC) of NFB is 12 percent. The systematic risk of NFE is similar to the NFB as a whole. As the power stations obtained ISO 140001 (Environmental Management Systems) certification recently, NFB enjoys the special tax exemption for NFE as an approved energy-saving investment. Using net present value (NPV) and internal rate of return (IRR) techniques, evaluate the NFE and recommend to NFB whether it is a rational decision to proceed with the expedition.

(b) Although NFB had formed strong relationships with banks and other lenders, the recent pandemic outbreak has been a significant pressure for NFB to fund the NFE. The management of NFB would like to reaffirm the weighted average cost of capital (WACC) for the NFE. The target capital structure of NFBs three main financing sources are 25 percent in long-term debt, 10 percent in preferred stock, and remaining in the common stock. Five years ago, NFB issued a 15-years, 11 percent non-callable bonds at par. The current yield of this AA-rated bond is 9.9 percent. The marginal tax rate of NFB is 26 percent. At the present time, NFB plans to pay an interim dividend of RM0.30 per share. Financial analysts forecasted earnings and dividends of NFB to grow at a constant rate of 5.5 percent in the foreseeable future. When the market return rises by 2 percent, the return from NFB will rise by 1.4 percent in respect to the same conditions which have caused the market return to change. Further information reveals that Malaysian treasury bonds yield 5 percent, while the market risk premium is 11 percent.

New preferred stock of NFB could be issued to the public at a par of RM1.50 per share, with an annual dividend of RM0.15. The firm must pay 2 percent of the face value in flotation cost for the issuance of this preferred stock. Based on the targeted capital structure, determine the WACC for NFB in financing the NFE.