TOPIC: CAPITAL STRUCTURE Subtopic: Capital Structure Policy

Statement: The finance director of ATC Bhd, Miss Kay, has heard that the market value of the company will increase if the weighted average cost of capital is decreased. Miss Kay proposed to decrease the weighted average cost of ATC Bhd by issuing RM40 million bonds at their nominal rates of RM100 per bond. The bonds would pay annual interest of 8%. The bonds will be redeemed at 10% premium to nominal value after 10 years.

Question: Discuss whether the director's view (Miss Kay) that issuing traded bonds will decrease the weighted average cost of capital ATC Bhd and thereby increase the value of the company. Discussion should consider from viewpoint of: (a) Market imperfections (b) Pecking order theory

(20 marks)