SECTION 2 Question 16 Farmhouse Berhad, a famous company producing milk-based products is considering setting up a new product soon. The company's current annual sales and earnings are RM30 million and RM15 million, respectively. The new product is expected to have an initial outlay of RM1.5 million and annual earnings of RM600,000. Assume all earnings streams are pre- tax and perpetuities. Previously, the company paid out 50% of all of its earnings to the shareholders as dividends and financed capital expenditures with equity financing. The top management of the firm believes that the new product will have the same risk as existing assets. The current required return on asset is 10% and the company tax rate is 28%. Calculate: i) The value of the firm if the firm uses bonds with an interest rate of 4% to finance the capital expenditure of the new product. (3 marks) ii) The weighted average cost of capital of the firm after the financing has occurred. (7 marks) SECTION 2 Question 16 Farmhouse Berhad, a famous company producing milk-based products is considering setting up a new product soon. The company's current annual sales and earnings are RM30 million and RM15 million, respectively. The new product is expected to have an initial outlay of RM1.5 million and annual earnings of RM600,000. Assume all earnings streams are pre- tax and perpetuities. Previously, the company paid out 50% of all of its earnings to the shareholders as dividends and financed capital expenditures with equity financing. The top management of the firm believes that the new product will have the same risk as existing assets. The current required return on asset is 10% and the company tax rate is 28%. Calculate: i) The value of the firm if the firm uses bonds with an interest rate of 4% to finance the capital expenditure of the new product. (3 marks) ii) The weighted average cost of capital of the firm after the financing has occurred. (7 marks)