You have been appointed as the Finance Manager of Shangpuri Hotel Bhd. As a finance manager, you are evaluating Project PJ10B, an investment project and TWO (2) other additional projects namely Project Bee and Project Cee. You are required to deliver a comprehensive report explaining the application of numerous financial practices for valuing investment projects for the board of directors’ strategic decision. Your finance department have forecasted cash flows to assess the viability of Project PJ10B, Project Bee and Project Cee incorporating risk into the calculations.

Additional information:

1. Current dividend for Shangpuri Hotel Bhd’s ordinary stock is RM2.50 and dividend growth rate is 6%.

2. Shangpuri Hotel Bhd is planning to issue new ordinary stock at RM50 with a flotation cost of 9%.

3. The company’s bond is paying a 6% coupon payment. Corporate tax stood at 30%.

4. Shangpuri Hotel Bhd’s capital structure comprising of 40% debt and 60% common stock.

Information related to Project PJ10B

1. Cost of this investment is RM1,200,000.

2. The invest is estimated to effectively contribute for 3 years. Ignore the residual value.

3. Depreciation for the Project PJ10B is subject to a straight line method.

4. Further, yearly cash inflow is estimated at $900,000 and cash outflow RM400,000 per year. Cash inflow and outflow in entitle for tax benefit.

5. Finance department estimates discount factor at 7.0%.

Information related to Project Bee

1. Cost of this investment is RM120,000

2. Finance department estimates discount factor at 8.0%.

3. Ignore tax and depreciation.

Economy	Probability	Cash Flow
Good	0.30	RM20,000.00
Normal	0.50	RM30,000.00
Bad	0.20	RM40,000.00

Information related to Project Cee

1. Cost of this investment is RM120,000

2. Finance department estimates discount factor at 8.0%.

3. Ignore tax and depreciation.

Economy	Probability	Cash Flow
Good	0.30	RM50,000.00
Normal	0.50	RM30,000.00
Bad	0.20	RM20,000.00

REQUIRED:

QUESTION 1

a. Calculate cost of new ordinary stock for Shangpuri Hotel Bhd. Current dividend for ordinary stock is $2.50 and dividend is expected to grow at 6%.

b. Explain THREE (3) advantages and THREE (3) disadvantages of equity financing.

c. Calculate cost of debt for Shangpuri Hotel Bhd

d. Explain THREE (3) advantage and THREE (3) disadvantage of debt financing.

e. Calculate weighted average cost of capital for the company

f. Explain FIVE (5) uses of WACC.