SECTION D (36 marks)

Attempt all questions in this section.

Maju Usaha Berhad is a manufacturing company, and it has been in operation for nearly 25 years. The companys brief profile is as given below:

1. Recent price of the stock RM4.54
2. Beta 0.74
3. Market capitalization RM3.513 billion
4. Shares outstanding 773.8 million
5. Annual dividend (paid) per share RM0.18
6. Dividend yield 3.96%
7. Book value per share RM1.76
8. Book value of equity RM1.36 billion
9. Sales (TTM Trailing 12 months) RM60.56 billion
10. Price/Book value 2.58
11. Current ratio 1.84
12. Debt/Equity ratio 1.62

The company Financial Manager has estimated that the market risk premium is 10 percent. The estimated beta is 0.74 (as shown above). However, two prominent analysts estimate the beta to be around 0.9 and 0.8. According to finance.yahoo.com, Treasury Bills (T-Bills) were paying 2.8 percent at the time.

The company has only paid dividends for about three years, so estimating the future rate for dividend using discount model is rather problematic. However, analysts have estimated the growth in earning per share for the company will be 6.5 percent for the next 5 years.

Information from Bond Pricing Agency (BPA) indicates that the company has used four bonds with different maturities to finance its assets. The book value and the market value of each bond and their respective yield to maturity (YTM) are as shown in the table below.

Coupon Rate (%)	Book Value (Face Value in millions)	Market Value (in millions)	Yield to Maturity (%)
6.370	RM 496	RM 507.8	4.857
7.250	496	506.0	7.067
7.625	200	226.1	6.502
7.600	297	300.0	7.509
Total	RM1,489	RM1,539.8

Questions

Use the above information to answer the following questions.

1. If the company were to issue equity to raise capital, what would be the cost of equity using the capital asset pricing model (CAPM). Use average beta as provided by the above information.

(4 marks)

2. Determine the cost of equity using the constant dividend growth model.

(4 marks)

3. What is the average value of the cost equity based on the both methods in (a) and (b)?

(2 marks)

4. This company utilizes the weighted average cost of debt to determine the cost of debt. Determine the weighted average cost of debt using the bond book value and the market value.

(4 marks)

5. What is the average value of the cost of debt using both the book and market value of the bond?

(2 marks)

6. If the tax rate of the company depends on the last alphabet of your mothers name as shown in the table below, determine the companys weighted average cost of capital (WACC). (Shirley)

(6 marks)

7. Provide the reason why it is essential for a company to estimate the various costs of capital before considering to raise the various sources of financing? Justify

(3 marks)

8. If the company is considering to venture into an investment whose proposed capital structure mix differs from current level, should the company continue to use the computed WACC? Justify.

(3 marks)