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A Malaysian listed firm in the business of producing iron and steel products for the construction industry, is seeking to improve its overall value by altering its capital structure. It currently has total capital of RM 600 million, consisting of equity of RM 500 million and debt of RM100 million. The CFO is proposing that the company issue RM300 million of sukuk and use the proceeds to buy back RM 300 million worth of stocks. He argues that since there will be less equity in the capital structure, the firm's WACC (weighted average cost of capital) will be lower thereby causing firm value to be higher. The company has decided on two alternative sukuk structures to raise the needed RM300 million: a) A 30-year ljara sukuk with 9% annual coupon. The company will sell and lease back its main factory and land in Klang to the SPV for RM300 million. It will repurchase the underlying asset at maturity for RM300 million. b) A 30-year Mudarabah sukuk with a 70/30 PSR. 30\% of the company's net profits will be paid as dividends each year to sukuk holders. There will be no other payments to sukuk holders. The company has asked you for advice on the appropriate choice of sukuk for its capital restructuring. In undertaking the evaluation, you need to address the following questions: i) Evaluate the likely impact of each sukuk on the firm's weighted average cost of capital (WACC). Justify your reasoning. (15 marks) ii) Evaluate the impact each sukuk structure will have on the firm's overall risk. Justify your evaluation. (15 marks) iii) Suppose the industry average D/E ratio is 0.5, what is the likely impact of each sukuk structure on the firm's value. Explain. (30 marks) iv) What would you recommend the firm to do in its efforts to raise its value? (40 marks) A Malaysian listed firm in the business of producing iron and steel products for the construction industry, is seeking to improve its overall value by altering its capital structure. It currently has total capital of RM 600 million, consisting of equity of RM 500 million and debt of RM100 million. The CFO is proposing that the company issue RM300 million of sukuk and use the proceeds to buy back RM 300 million worth of stocks. He argues that since there will be less equity in the capital structure, the firm's WACC (weighted average cost of capital) will be lower thereby causing firm value to be higher. The company has decided on two alternative sukuk structures to raise the needed RM300 million: a) A 30-year ljara sukuk with 9% annual coupon. The company will sell and lease back its main factory and land in Klang to the SPV for RM300 million. It will repurchase the underlying asset at maturity for RM300 million. b) A 30-year Mudarabah sukuk with a 70/30 PSR. 30\% of the company's net profits will be paid as dividends each year to sukuk holders. There will be no other payments to sukuk holders. The company has asked you for advice on the appropriate choice of sukuk for its capital restructuring. In undertaking the evaluation, you need to address the following questions: i) Evaluate the likely impact of each sukuk on the firm's weighted average cost of capital (WACC). Justify your reasoning. (15 marks) ii) Evaluate the impact each sukuk structure will have on the firm's overall risk. Justify your evaluation. (15 marks) iii) Suppose the industry average D/E ratio is 0.5, what is the likely impact of each sukuk structure on the firm's value. Explain. (30 marks) iv) What would you recommend the firm to do in its efforts to raise its value? (40 marks)