Corporate Finance Assignment 2 Q&A

Question 1 Coxner Industries Berhad has an expected Earnings Before Interest and Taxes (EBIT) of $420,000 in perpetuity and a tax rate of 35 percent. The firm has $70,000 in outstanding debt at an interest rate of 8 percent and its unlevered cost of equity is 15 percent. Compute the Weighted Average Cost of Capital (WACC) of the levered firm with and without tax. Question 2 MH Berhad has expected earnings before interest and taxes of $8,100. The unlevered cost of capital is 11 percent and total debt financing with a face value is $12,000. The debt has an annual 8 percent coupon and tax rate is 34 percent. Calculate the Weighted Average Cost of Capital (WACC) of the levered firm without tax Question 3 Aero Berhad is an unlevered company and valued at $640,000. Aero currently decided to include debt in its capital structure. The current cost of equity is 12 percent and the interest rate is 8 percent. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 30 percent. Calculate the Weighted Average Cost of Capital (WACC) of the levered firm with tax. Question 4 Tenaga Nasional Berhad (TNB) is considering RM40 million projects in its power system division. Mr. Fazrul Rahman, the company’s chief financial officer, has evaluated the project and determines that the project’s unlevered cash flow will be RM2.6 million per year in perpetuity. Mr. Fazrul Rahman has revised two possibilities for raising initial investment: Issuing 10 year bonds or issuing common shares. TNB’s cost of debt is 7.2 percent, and its cost of equity is 11.4 percent. The company target RM32 million as debt and RM8 million as common shares. TNB is in the 34 percent tax bracket. By using Weighted Average Cost of Capital (WACC), should TNB accept the project? State the reason. Question 5 Tah Hoo Tang Bhd. has Earnings Before Interest and Tax (EBIT) RM4, 000 with 20,000 shares outstanding and 15 percent return on equity. The company decided to issue RM8, 800 worth of bond at 10 percent interest. The marginal tax rate of 34 percent. Question 6 Last year Gator Getters, Inc. had $50 million in total assets. Management desires to increase its plant and equipment during the coming year by $12 million. The company plans to finance 40% of the expansion with debt and the remaining 60% with equity capital. Bond financing will be at a 9% rate and will be sold at its par value. Common stock is currently selling for $50 per share, and flotation costs for new common stock will amount to $5 per share. The expected dividend next year for Gator is $2.50. Furthermore, dividends are expected to grow at a 6% rate far into the future. The marginal corporate tax rate is 34%. Internal funding available from additions to retained earnings is $4,000,000.