QUESTION 3 (25 MARKS)

a. Anugerah Inc. Had completed a 5-for-1 stock split two days earlier. Stock is currently selling for RM20 per share. Three years back, the firm had a 2-for-1 split. Assume that the stock split had never happened. If other things being equal, how much would the stock price of Anugerah Inc. be?

(3 marks)

b. Mr. Boon and Mrs. Siva both are investors. Both have different risk preference. Mr. Boon prefer companies that offer low dividend payouts, while Mrs. Siva is the opposite, invest in companies with high dividend payout. What do you think will happen if the firm changes its policy from a high payout to a low payout. Elaborate and discuss the theory behind this.

(6 marks)

c. Fana Inc is evaluating two (2) alternatives, either to do a stock repurchase or extra dividend. To do so, the firm will need to spend RM9,000. The stock is currently selling at RM64 per share, with an earning of RM1.30 per share. There are 1,000 shares outstanding. Ignoring taxes and other implications, evaluate both alternatives on the effect on the price per share of the stock and shareholder wealth.

(6 marks)

d. Tabah Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value RM1,000 each. The common stock currently sells for RM34 per share and has a beta of 1.15, the preferred stock currently sells for RM80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firms tax rate is 32 percent. The after tax cost of debt is 7.61%. The market value of debt and the firm is RM191,100,000 and RM739,100,000 consecutively. What discount rate should the firm apply to a new projects cash flows if the project has the same risk as the firms typical project? Show your workings.

(10 marks)