Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

SSK Berhad is a public listed company in Finance Industry.In line with the company's expansion plan, it needs to raise RM5,000,000 either through bonds or

SSK Berhad is a public listed company in Finance Industry.In line with the company's expansion plan, it needs to raise RM5,000,000 either through bonds or common shares.The company's capital structure comprises of:

Instrument Details Cost of Capital (%)

Bonds 2,500 units @RM857.83 7.18%

Preferred Shares 100,000 units @2.25/ unit 4%

Common Shares 800,000 units @RM3.56/ unit 11.35%

The options are as follows:

1.Bonds: 2,000 units of bonds for 15 years.The coupon is 6.5% quarterly, and the bond can be sold for RM840 per unit.

2.Common stocks: 2,000,000 units at RM1/ share, and the valuation is based on CAPM.

3.Financing: Maybank offers the same amount of business financing for 15 years monthly instalment of RM21,945.

Proceed from the issuance of the instrument will be used to retire the common stocks for the same amount.The company's beta with the issuance of new instrument will increase to 1.5 from 1.25.The expected market rate is 9.5% and the risk free rate is 4%.Tax rate stands at 25%.

Required:

a)Calculate SSK's adjusted weighted average cost of capital (wacc) before the issuance of the new instrument.(6 marks)

b)Calculate the cost of capital of each option.(9 marks)

c)Choose the lowest cost of capital and incorporate it into SSK's capital structure.Assess SSK's adjusted wacc inclusive of the new instrument.(10 marks)

d)The issuance of the company's common stocks has been underwritten by Maybank as a sole underwriter and it is classified as an investment grade.Would you buy the company's stocks?Discuss. (5 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments

Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter

8th Canadian Edition

007133887X, 978-0071338875

More Books

Students also viewed these Finance questions