QUESTION 3 MC6122 en the following information for Clean Technologies Berhad (CT

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QUESTION 3 MC6122 en the following information for Clean Technologies Berhad (CTB), find the WACC. Assume the tax rate is 35 percent. Debt 2,500 7.7 8 years to maturity, selling for 103 percent of par, the bonds make annual payments 75,000 shares outstanding selling for RM50 per share, the beta is 0.85 10,000 shares of 5 percent preferred stock outstanding, currenty selling for RM80 per share. 5 percent market risk premium and 6 percent risk-free rate. 5 percent coupon bonds outstanding, RM1,000 par value, Common Stock: Preferred Stock: Market Hints: First, find market value (MV) of these sources of financing (MV Debti, MV Equiny and MV Pree Stock), then calculate the value of the firm (V). You also need to calculate YTM for the bond (15 points) Clean Energy Supplies Berhad (CESB) is a competitor to Smart Energy Generator Berhad (SEGB) and CESB is considering a project that will result in initial after tax cash savings of RM9 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. The firm has a target debt/equity ratio of 0.75, a cost of equity of 22 percent, and after-tax cost of debt of 10 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes. Therefore, the management decides to use the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. Under what b) circumstances should CESB take the project? Hint: Calculate the cost of the project and your recommendation is based on this cost. 10 points l in mergers an

Explanation / Answer

DEBT: A Market value of Debt               2,575,000 (2500*1000*1.03) B Annual Coupon payment                  187,500 (2500*1000*0.0775) C=B/A Before tax cost 0.072815534 D Tax Rate 0.35 E=C*(1-D) After tax cost 0.047330097 Cd After tax cost in percentage 4.73% COMMON STOCK G Market Value of shares               3,750,000 (75000*50) H Beta of stock 0.85 I Market risk premium 5% J Risk Free rate 6% K=J+H*I Required return from stock 10.25% Cs Cost of common stock 10.25% PREFERRED STOCK L Market Value of shares                  800,000 (10000*80) M Annual dividend cost                     50,000 (10000*5) N=M/L Cost of preferreded stock 0.0625 Cp Cost of preferreded stock in percentage 6.25% Q=A+G+L Total Market Value of Capital               7,125,000 Wd=A/Q Weight of Debt in total capital 0.361403509 Ws=G/Q Weight of Common stock in total capital 0.526315789 Wp=L/Q Weight of Preferred stockin total capital 0.112280702 WACC=Wd*Cd+Ws*Cs+Wp*Cp Weighted Average cost of Capital(WACC) 7.81% b A Debt Equity ratio 0.75 B Weight of Equity in the capital 0.571428571 (1/(1+0.75) C Weight of Debt in the capital 0.428571429 (0.75/(1+0.75) D After tax cost of Debt 10 percent E After tax cost of Equity 22 percent F=B*E+C*D Weighted average cost of capital 16.85714286 percent G Weighted average cost of capital 16.86% H=G+3 Risk adjusted required return 19.86% I Savings next year               9,000,000 J Savings growth rate to perpetuity 5% K=I/(H-J) Present Value of future cash flows            60,565,276 CESB can take the project if initial cost is lrss than          60,565,276 RM CESB can take the project if initial cost is lrss than 60.6 Million RM

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