QUESTION 2

Naruto Bakery has a capital structure consisting of:

42,000 issued and paid-up ordinary shares RM105,000

5,000 issued and paid-up 10% Preference shares RM15,000

8% Bonds (10-year maturity) RM30,000

The balance of retained earning as at 1 January 2021 was RM75,000. The market price per unit of the companys financial instruments are as follows:

Ordinary shares : RM2.50 (last dividend paid was RM0.50; growth rate is 5%

Preference shares : RM3.00 8%

Bonds : RM890.00 (par value RM1,000)

The company is considering to invest in new project worth RM80,000. The floatation cost to sell more shares and bonds are 5%. The corporate tax rate 25%.

You are required to calculate (show all workings):

a. The number of shares and bonds to be issued [16 marks]

b. The companys cost of debt, preference share, retained earnings and new issuance of ordinary shares. [25 marks]

c. The maximum amount of capital expenditure without needing to issue new ordinary shares. [2 marks]

d. The companys cost of capital if they choose to undertake the project. [7 marks]