Nusa Puncak Limited (NPL) is considering several projects as listed below. The company has a policy of adjusting the weighted average cost of capital (WACC) to compensate the risk associated with individual project. The company will add 2% to the original WACC for high risk project or will deduct 2% from the WACC for low risk project while retain the WACC for average risk project.

Project	Expected rate of return (%)	Required investment (RM)	Risk
A	10	110 000	Low
B	8	510 000	High
C	12	160 000	Average
D	9	210 000	High
E	14	460 000	High
F	9	610 000	Average
G	9	310 000	Low

NPL has a capital structure of 40% debt, 15% preferred shares and 45% common equity. NPL has a capability of making new long term loan at a rate of 6%. Other than bank loan, NPL is also considering to issue preferred stocks at a price of RM96 per share with an annual dividend of RM11 per share.

NPLs ordinary shares is currently selling at RM80 per share. Last year dividend was RM5 per share and this amount is expected to grow at a constant rate of 6% per annum. If NPL plans to issue new common stock, a floatation cost of 10% is required for investment banks fees. NPLs current corporate tax is 40%.

Calculate

(a)

1. After tax cost of debt (2M)
2. Cost of preferred shares (2M)
3. Cost of retained earnings (4M)
4. Cost of ordinary shares (4M)

(b) With an assumption that the current capital structure is the target capital structure, calculate the weighted average cost of capital (WACC) for NPL if the company would like to issue new ordinary shares for its equity portion of financing. (8M)

(c) Suppose all projects are independent and NPL has no capital constraints, which project(s) should be accepted and rejected by NPL? How much NPL can save from the original total invested capital based on your analysis? (12M)

(d) Suppose NPL is considering to change its capital structure by decreasing the debt portion from 40% to 30%, retaining the 15% preferred shares and increasing the equity from 45% to 55%. All else equal except for weightage, recalculate the new WACC if NPL would use retained earnings as the equity financing. Briefly comment on your answer on the new WACC as compared to (b).