Question 1

(a) "The optimal capital structure of a firm is often defined as the proportion of debt and equity that results in the lowest weighted average cost of capital (WACC) for the firm."

Required:

(i) Discuss the above statement based on the following theories:

Traditional Theory;

Modigliani and Miller (No Tax);

Modigliani and Miller (With Tax);

The Pecking Order.

(16 marks)

(ii) Based on the answer in part 2(a)(i), in your opinion, which is the best capital structure theory? You are required to support your opinion with ANY TWO (2) reasons. (5 marks)

(b) Anthony Lim is the chief executive director of AL Bakery Bhd. The share price of AL Bakery Bhd. was RM3.00 at 9.00 a.m. Anthony Lim was informed at 10.00 a.m. that Genting Bhd. is interested to take over AL Bakery Bhd with an offer price of RM3.50 per share. The official announcement of the potential acquisition was released on the newspapers and websites at 4.00 p.m. on the same day.

Assume that Anthony Lim is allowed to buy the shares of AL Bakery Bhd. Explain whether Anthony Lim be able to earn extraordinary return if he were to invest shares of AL Bakery Bhd. immediately after he was informed the news of acquisition at 10.00 a.m. in the following efficient market hypotheses:

(i) Weak form efficiency market hypothesis;

(ii) Semi-strong form efficiency market hypothesis;

(iii) Strong form efficiency market hypothesis.

(9 marks)

[Total: 30 marks]

Question 2

(a) Great Library Sdn. Bhd. plans to lease 10 photocopy machines for its 10 branches in Malaysia. It is now considering whether to be engaged in operating lease or finance lease. Great Library Sdn. Bhd. does not plan to own the 10 photocopy machines and wish to upgrade or change to newer model in the near future. Besides, Great Library Sdn. Bhd. also hopes that maintenance and repairing services will be provided by the lessor.

Required:

(i) Distinguish any THREE (3) features of operating lease and finance lease. (12 marks)

(ii) Based on the above case, identify a suitable lease for Great Library Sdn. Bhd. You are required to support your answer with ANY TWO (2) reasons. (8 marks)

(b) TGIF Bhd. is planning to raise fund in order to finance its new project in Kuala Lumpur. Currently, TGIF Bhd. highly gears with a debt ratio of 500%. Due to its high financial leverage risk, it has a high cost of borrowing. The existing shareholders of TGIF Bhd. are not willing to issue new ordinary shares as it will lead to dilution of ownership.

As a financial controller of TGIF Bhd., you are required to suggest ONE (1) source of finance for the company based on the above scenario and support your suggestion with ANY THREE (3) reasons. (10 marks) [Total: 30 marks]