Question

Question 2 Man Company has a capital structure made up of 40% debt and 60% equity and a taxta A new issuance of bonds maturing in 20 years can be distributed with a coupon rate of 9% a RM1.098.18 with no flotation costs. The firm has no internal equity available for investment at da tax rate of 25%. of 9% at a price of Scanned with CamScanner { 329 but can issue issue new common stocks at a price of RM45. The next expected dividend on the stock is The dividend for Man Company is expected to grow at a constant annual rate of 5% per year Iv. Flotation costs on new equity will be RM7 per share. The company has the following endent investment projects available: indefinitely. Flot: independenti Project IRR Initial Outlay RM100,000 RM 10,000 R M 50,000 3 10% 8.5% 12.5% Required: hich of the above projects should the company undertake?

Answer 1

Ans - price of share = D₁ / ( r - g)

price of share = 45

less flotation cost = 7

share price = 38

38 = 2.70 / ( r - 5%)

(r - 5%) = 2.70 / 38

(r - 5%) = 7.105%r

r = 7.105% + 5%

r = 12.105%

NOTE - D₁ is dividend of next year

DEBT PART -

USING FINANCIAL CALCULATOR

PV ( CURRENT PRICE) = -1098.18

FV(PAR VALUE) = 1000

COUPON 9%(PMT) = 9% * 1000 = 90

N (TIME) = 20 YEARS

CPT , THEN PRESS I/Y

= 8%

WACC = 0.4 * DEBT(1 - TAX) + 0.6*EQUITY

= 0.4 (8%)(1-0.25) + 0.6 (12.105%)

= 2.4% + 7.26%

= 9.66%

It is the minimum required rate of return . We should not accept project which have IRR less than 9.66%. So by question we only choose project 1 or 3