You have been appointed as the Finance Manager of Bright Star Bhd, a public listed SME company on the Bursa Malaysia security market. The company was listed five years ago. Now, the board of directors planning for the next wave of growth. As a finance manager, you are evaluating an investment project. You are required to prepare a comprehensive report explaining the application of numerous methods for valuing investment projects for the board of directors strategic decision. The is considering of issuing new ordinary stock, new preferred stock, new bonds, and utilizing retained earnings. Your finance department has gathered formation to evaluate the viability of the projects. Corporate tax stands at 28%. (This rate applies to all the investment and financing decision made by the company)

Company related information:

1. Current dividend for the companys ordinary stock is RM1.00 and the dividend growth rate is 3.0%. The company will issue new ordinary stock at RM12.00 per share. The flotation cost of 2.5%.

2. The company will issue new preferred stock at RM9.00 each with a flotation cost of 4.5%. The preferred stock dividend will be RM1.20

3. The companys bond is paying a 6% coupon payment.

4. Bright Star Bhds capital structure comprising:

Ordinary shares 3,600,000

Preferred shares 1,400,000

Bonds 3,000,000

Retained earnings. 3,000,000

5. The company has identified TWO investment projects. The details are as follows.

Investment project related information:

Name of project: Project E ($20,000 Investment cost)

Year Cash Flow

1 ........................... $ 5,500

2 ........................... 6,500

3 ........................... 8,000

4 ........................... 10,000

5 ........................... 13,000

6 ........................... 15,000

7 ........................... 17,000

Name of project: Project H ($20,000 Investment cost)

Year Cash Flow

1 ........................... $17,000

2 ........................... 15,000

3 ........................... 13.000

4 ........................... 9,000

5 ........................... 6.000

REQUIRED:

QUESTION 1

Based on the available information, you are required to compute the weighted average cost of capital (WACC) for the Bright Star Bhd. Provide detailed workings for all the relevant components involved. (Total 19 marks)

QUESTION 2

Discuss FOUR (4) advantages of using WACC as cost of Funding compared to any other rates. Answer must supported by relevant academic evidence.

(Total 8 marks)

QUESTION 3

The following questions apply corporate tax and depreciation based on the straight-line method, assume zero residual value.

a. Determine the net present value of the Projects E and Project H based on a zero discount rate. (12 marks)

b. Determine the net present value of the Projects E and Project H based on a 9 percent discount rate (6 marks)

c. Compute the internal rate of return on Project E and the internal rate of return on Project H using the interpolation method. Graph a net present value profile (draw in excel spreadsheet) for the two investments using the appropriate scale on the vertical and horizontal axis. (12 marks)

d. If the two projects are independent in nature, what would your acceptance or rejection decision be if the discount rate is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary). (4 marks)

e. If the two projects are mutually exclusive, what would be your decision if the cost of capital is:

(1) 12 percent,

(2) 15 percent,

(3) 18 percent (4 marks)

QUESTION 4

Critically analyze the advantages and disadvantages between NPV and IRR for investment decisions. (Provide evidence from any Five (5) academic journals). (Total 25 marks)

QUESTION 5

Prepare an executive summary and recommendation to the Board of Directors on investment projects of Bright Star Bhd.

(Executive summary should cover: the objective of the report, investment project being considered, sources of financing considered, the outcome of the investment appraisal based various capital budgeting techniques applied and recommendation to Bright Star Bhd). (Total 10 marks)