TOPIC: CAPITAL STRUCTURE

2. JULY2020:Q5 Seroja Sdn Bhd is an interior design firm. It is currently all-equity financed firm. The cost of equity for this firm is 8%. This firm intends to undertake a new project costing RM500,000. If the project is executed, it is expected that the earnings before interest and tax (EBIT) will increase to RM275,000 per year in perpetuity. The corporate tax rate is 25%. Required: If 6% Debentures is to be issued to finance the project, calculate: i. The value of the firm ii. The overall cost of equity (RWACC) (2 marks) (2 marks)