The projects$$ costs of capital vary because the projects have different levels of risk. The

company$$s optimal capital structure calls for $35\%$ debt and $65\%$ common equity.

Other financial information available:

$$ Expected EBIT: RM$5,500\mathrm{.}000$

$$ Debts:

Existing $$ RM$3$m worth of Debentures carrying a $6\%$ Coupon rate.

New $$ Additional Debentures will carry a $7\%$ Coupon rate.

$$ Dividend paid last year: RM$0\mathrm{.}60$ per share

$$ Number of common stocks issued and outstanding: $1,000,000$ shares with $$1\mathrm{.}00$ par value

$$ Tax rate: $30\%$

a$)$ If OIO bases its dividends on the residual model, what will be its total amount of

dividend to be paid and its dividend pay$-$out ratio? $(7\mathrm{.}5$ marks$)$

b$)$ Suppose OIO maintains its dividend payment at RM$0\mathrm{.}60$ per share $($i$.$e$.,$ OIO Healthcare

follows a constant dollar dividend policy$).$ Can OIO Healthcare finance the equity

portion of the capital budget from its internally generated funds? Explain. $(4$ marks$)$

c$)$ If OIO practices the constant dividend pay$-$out ratio of $30\%,$ what will be its total

amount of dividend to be paid? Does the company have sufficient retained earnings to

finance the equity portion of its capital budget? Explain. $(3\mathrm{.}5$ marks$)$

$[$Total: $15$ marks$]$

N$.$B: For cash flows, round$-$up your calculations to the nearest ringgit. For rates of return,

use $2-$decimal p

Step $1$: Determine viable project$/$s whose IRR $>$ Adj WACC

Project WACC $\%$ IRR $\%$ Decision CB $

$120\mathrm{.}618\mathrm{.}5$ Reject $0$

$214\mathrm{.}517\mathrm{.}4$ Accept $5\mathrm{.}0$

$310\mathrm{.}910\mathrm{.}2$ Reject $0$

this step one i get from my lecturer how did he get the wacc?