DFN5214: Fundamentals of Finance 2 Assignment, MMU, Malaysia Mutiara Berhad is interested in measuring its overall cost of capital. The current investigation has gathered the following data

QUESTION 1

Mutiara Berhad is interested in measuring its overall cost of capital. The current investigation has gathered the following data. The firm is in the 40% tax bracket

Mutiara Berhad can raise debt by selling RM1000 par value, 8% coupon interest rate, and 20 years of bonds on which annual interest payments will be made. to sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay a floatation cost of RM30 per bond.

The firm can sell 8% preferred stock at its RM95 per share par value. The cost of issuing and selling the preferred stock is expected to be RM5 per share. Preferred stock can be sold under these terms.

The firm’s common stock is currently selling for RM90 per share. The firm expects to pay cash dividends of RM7 per share next year. The firm’s dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by RM7 per share, and the floatation costs are expected to amount to RM5 per share. The firm can sell new common stock under these terms.

When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available RM100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new communication stock as the form of common stock equity financing.

Answer the following questions:

• Define the Weighted Average Cost of Capital (WACC).
• Calculate the after-tax cost of debt.
• Calculate the cost of preferred stock.
• Calculate the cost of new common stock.
• Why is a Loan a Lower-cost Source of Funding?
• Calculate the firm’s weighted average cost of capital using retained earnings and the capital structure weights shown in the table above.
• Define the cost of capital and the tree importance of cost capital to capital structure.

QUESTION 2

• The following financial data on the Daun Hijau Company are available:

Earnings available for common stockholders                RM800,000
Number of shares of common stock outstanding       400,000
Earnings per share (RM800,000/400,000)                   RM2
Market price per share                                                                RM20
Price/earnings (P/E) ratio (RM20/ RM2)                             10

The firm is currently considering whether it should use RM400,000 of its earnings to pay cash dividends of RM1 per share or to repurchase stock at RM20 per share.

1. Explain what is stock repurchase and its advantages.
2. Approximately how many shares of stock can the firm repurchase at the RM20-per-share price, using the funds that would have gone to pay the cash dividend, and how many shares will be outstanding?
3. Calculate the EPS after the repurchase. Explain the effect on EPS and the number of shares outstanding.
4. If the stock still sells at 10 times earnings, what will the market price be after the repurchase?
5. Explain why a firm might prefer a stock repurchase rather than an increase in the firm’s regular dividend.

• Among owns 400 shares of the food company Nyet Food Berhad which he purchased during the recession in January 2017 for RM35 per share. Nyet Food Berhad is regarded as a relatively safe company because it provides a basic product that consumer need in good and bad economic times. Read in the Malaysian Business Magazine that the company’s board of directors had voted to split the stock 2-for-1. In June 2020, just before the stock split, Nyet Food Berhad shares were trading for RM75.14.

1. Explain the stock splits and the advantages of stock splits.
2. How many shares of Nyet Food Berhad will Aming own after the stock split?
3. Immediately after the split, compute the value of Nyet Food Berhad.
4. Compare the total value of Aming’s stock holdings before and after the split, given that the price of Nyet Food Berhad stock immediately after the split was RM37.50. What do you find?
5. Does Aming experience a gain or loss on the stock as a result of the 2-for -1 split?

Answer

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