Sime Bhd was founded 15 years ago with 100% equity financing, the company purchases real estate, including land and buildings, and rents the property to tenants. The company shown perpetual earnings before interest and tax of RM15 million. The ordinary shares of Sime Bhd have a nominal value of RM1 per share. Currently, the cost of equity of the company is 12% and the company pays corporate tax at a rate of 24%. The following information has been extracted from the statement of financial position of Sime Bhd, a listed company:

Equity & Reserves Ordinary shares 15,000,000 Retained earnings 29,000,000 Total RM44,000,000

Sime Bhd's board is looking to finance its investments in purchasing of a huge tract of land in Sabah over the next three years, forecast to cost up to RM25 million. This investment in the land will increase the perpetual earnings before interest and tax of the company by RM6 million. The board are open to any sources of financing to finance the expansion of the new investment as long as it will increase the value of the company. This means that investments can be financed from cash which can be made available internally or issuing new debt securities or issuing new equity externally. Board members have made a number of suggestions about how this can be done:

Director A has suggested that the company does not have a problem with funding new investments, as it has cash available in the retained earnings of RM29 million. If extra cash is required soon, Sime Bhd could reduce its investment in working capital. Further the company will not oblige to pay dividend during hard time as oppose to the debt issuing.

Director B has suggested that the firm will be more valuable if the company include debt in its capital structure, therefore he is proposing the company should finance the investment with debt. He thinks that the company should issue bonds at par value with 8% coupon.

Director C has commented that it is better for the company to finance half of the investment with debt financing and the remaining by issuing new ordinary shares, he further argues that the company can still enjoy the benefit of issuing debt without significant increase in the financial risk of the company.

Required: a. Before the investment decision, calculate the following; i. The value of Sime Bhd ii. The company's cost of equity iii. The company's weightage average cost of capital (3 marks)

b. Based on the suggestions from each director, analyse the following; i. The value of Sime Bhd ii. The company's cost of equity iii. The company's weightage average cost of capital