Question 3: Shazan Bhd is a company listed on Bursa Malaysia which specialises in manufacturing office furnitures, the company is seeking additional finance of $5m to undertake a new project of furnishing the Presidential Palace in Nusantara, the new administrative capital of Indonesia. The finance director of Shazan Bhd is currently considering whether to raise the additional finance via debt or equity finance. The capital structure of the company (before the new finance has been raised) is as follows: $m $m Equity Ordinary shares (par value 50c per share) 10 30 40 Reserves Debt Bond X (par value $100) Bank loan 10 5 15 55 The ordinary shares of the company are currently trading at $1.70 each. It is estimated that the company's cost of equity is at 15%. Bond X will be redeemed at par in six years' time and pays a fixed annual interest of 8%. The pre-tax cost of this finance has been estimated at 10%. The bank loan is repayable in two years' time. It is a floating rate loan at LIBOR + 1%. LIBOR is currently at 3%. The finance director has made some initial enquiries which has revealed that further fixed rate debt finance could be raised at an annual post-tax cost of 7%. It has also been ascertained that floating rate debt finance could be obtained for LIBOR +2%. Market experts are divided over the expectations of future interest rates with some expecting rates to remain steady for the foreseeable future and others predicting an increasing of up to 4%. Shazan Bhd pays corporation tax at a rate of 30%. Required: (a) Given the information, compute the current market value of Bond X. (6 marks) (b) Compute the current weighted average cost of capital (WACC) of Shazan Bhd. (8 marks) Question 3: Shazan Bhd is a company listed on Bursa Malaysia which specialises in manufacturing office furnitures, the company is seeking additional finance of $5m to undertake a new project of furnishing the Presidential Palace in Nusantara, the new administrative capital of Indonesia. The finance director of Shazan Bhd is currently considering whether to raise the additional finance via debt or equity finance. The capital structure of the company (before the new finance has been raised) is as follows: $m $m Equity Ordinary shares (par value 50c per share) 10 30 40 Reserves Debt Bond X (par value $100) Bank loan 10 5 15 55 The ordinary shares of the company are currently trading at $1.70 each. It is estimated that the company's cost of equity is at 15%. Bond X will be redeemed at par in six years' time and pays a fixed annual interest of 8%. The pre-tax cost of this finance has been estimated at 10%. The bank loan is repayable in two years' time. It is a floating rate loan at LIBOR + 1%. LIBOR is currently at 3%. The finance director has made some initial enquiries which has revealed that further fixed rate debt finance could be raised at an annual post-tax cost of 7%. It has also been ascertained that floating rate debt finance could be obtained for LIBOR +2%. Market experts are divided over the expectations of future interest rates with some expecting rates to remain steady for the foreseeable future and others predicting an increasing of up to 4%. Shazan Bhd pays corporation tax at a rate of 30%. Required: (a) Given the information, compute the current market value of Bond X. (6 marks) (b) Compute the current weighted average cost of capital (WACC) of Shazan Bhd. (8 marks)
