You have been appointed as the Finance Manager of Bright Star Bhd, a public listed SME company on Bursa Malaysia security market. The company was listed five years ago. Now, the board of directors planning for 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 project 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 have gathered formation to evaluate 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. 2. Current dividend for the company's ordinary stock is RM1.00 and dividend growth rate is 3.0%. The company will issue new ordinary stock at RM12.00 per share. Flotation cost of 2.5%. The company will issue new preferred stock at RM9.00 each with a flotation cost of 4.5%. Preferred stock dividend will be RM1.20 The company's bond is paying 6% coupon payment. Bright Star Bhd's capital structure comprising: Ordinary shares 3,600,000 Preferred shares 1,400,000 3. 4. 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 1 2 3 4 5 Cash Flow $ 5,500 6,500 8.000 10,000 13,000 15,000 17,000 au 7 Name of project: Project H ($20,000 Investment cost) Year 1 2 3 4 5 Cash Flow $17,000 15,000 13.000 9,000 6.000 QUESTION 1 Based on the available information, you are required to compute weighted average cost of capital (WACC) for the Bright Star Bhd. Provide detailed workings for all the relevant components involved. (Total 19 marks) QUESTION 3 The following questions apply corporate tax and depreciation based on straight line method. assume zero residual value. a. b. C. Determine the net present value of the Projects E' and Project H' based on a zero discount rate. (12 marks) Determine the net present value of the Projects E' and 'Project H based on a 9 percent discount rate (6 marks) Compute the internal rate of return on Project E and the internal rate of return on Project H using interpolation method. Graph a net present value profile (draw in excel spread sheet) for the two investments using appropriate scale on vertical and horizontal axis. (12 marks) 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) 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) (Total 38 marks) d. e. You have been appointed as the Finance Manager of Bright Star Bhd, a public listed SME company on Bursa Malaysia security market. The company was listed five years ago. Now, the board of directors planning for 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 project 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 have gathered formation to evaluate 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. 2. Current dividend for the company's ordinary stock is RM1.00 and dividend growth rate is 3.0%. The company will issue new ordinary stock at RM12.00 per share. Flotation cost of 2.5%. The company will issue new preferred stock at RM9.00 each with a flotation cost of 4.5%. Preferred stock dividend will be RM1.20 The company's bond is paying 6% coupon payment. Bright Star Bhd's capital structure comprising: Ordinary shares 3,600,000 Preferred shares 1,400,000 3. 4. 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 1 2 3 4 5 Cash Flow $ 5,500 6,500 8.000 10,000 13,000 15,000 17,000 au 7 Name of project: Project H ($20,000 Investment cost) Year 1 2 3 4 5 Cash Flow $17,000 15,000 13.000 9,000 6.000 QUESTION 1 Based on the available information, you are required to compute weighted average cost of capital (WACC) for the Bright Star Bhd. Provide detailed workings for all the relevant components involved. (Total 19 marks) QUESTION 3 The following questions apply corporate tax and depreciation based on straight line method. assume zero residual value. a. b. C. Determine the net present value of the Projects E' and Project H' based on a zero discount rate. (12 marks) Determine the net present value of the Projects E' and 'Project H based on a 9 percent discount rate (6 marks) Compute the internal rate of return on Project E and the internal rate of return on Project H using interpolation method. Graph a net present value profile (draw in excel spread sheet) for the two investments using appropriate scale on vertical and horizontal axis. (12 marks) 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) 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) (Total 38 marks) d. e