CONFIDENTIAL AC/MAY 2019/MAF603

UNIVERSITI TEKNOLOGI MARA

COMMON TEST 2

COURSE : CORPORATE FINANCE

COURSE CODE : MAF 603
TEST : MAY 2019
TIME : 1 HOUR 30 MINUTES

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of TWO (2) questions.

2. Answer ALL questions

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 4 printed pages

© HakCiptaUniversitiTeknologi MARA CONFIDENTIAL

CONFIDENTIAL AC/MAY 2019/MAF603

QUESTION 1

Ramadhan Berhad has been a public listed company with Bursa Malaysia since 2009.
The principal activity of the company is supplying and packaging the production of “Ajwa
Dates”. The company has a debt to total assets ratio of 20%. The annual interest
payments on its outstanding debts amounted to RM 2.1 million. The cost of this debt is 7
percent per annum. Ramadhan Berhad expects its earnings before interest and taxes
(EBIT) to be RM24 million every year indefinitely.

The company proposes to announce the issue of an additional RM30 million of corporate
debt which will be used to repurchase the company’s stocks.

Required:

a) Determine the current value of Ramadhan Berhad.

(2 marks)

b) Calculate the company’s existing cost of equity.

(4 marks)

c) Assuming after the announcement is made, the company has to pay a 25 percent
corporate tax, calculate:

i. Value of the firm

ii. Required return on equity.

iii. Weighted average cost of capital

(9 marks)

d) Relates with the firm’s value and the required return on equity, discuss the
reaction of the firm’s stock price at Bursa Malaysia after the announcement made.

(5 marks)

(Total: 20 marks)

QUESTION 2

The State Government of Johor has awarded Razzaki Bhd and Roadbuilder Bhd, a
venture partner to construct 103 kilometers toll highway from Pontian to Medini City with a
concession period of 10 years toll collection. Both parties has agreed to the stipulated
terms and conditions on toll collection and cost of projects.

Below is an excerpt terms and condition of the project abide to Razzaki Bhd:

i. To incur cost on the initial investment in paving equipment for the construction
which is approximately at RM25 million. The equipment will be fully depreciated
using the straight-line method over its economic life of five years with an expected
cash flow of salvage value is RM2,000,000.

© HakCiptaUniversitiTeknologi MARA CONFIDENTIAL

CONFIDENTIAL AC/MAY 2019/MAF603

ii. To receive half (50%) of the total projection either pre-tax or post-tax earnings
cash flow on toll collection per year. The total projection pre and post-tax
earnings cash flow toll collection is as follows:

Period Pre-tax earnings (RM) Post-tax earnings RM

Year 1-3 12 million 9.12 million
Year 4-6 15 million 11.4 million
Year 7-10 18 million 13.68 million

iii. To incur repair and maintenance cost for a 43 kilometers maintenance works for a
period of ten (10) consecutive years estimated at RM3.5 million per year. These
costs do not yet include in the above pre or post-tax earnings cash flows. Upon
completion of 10 years period, Razzaki Bhd shall surrender the maintenance
works to Johor State Public Work Department.

Razakki Bhd plans to borrow partially which is 40% of the initial investment from
Commercial Bank Bhd at pre-tax cost of debt 9% per annum for 8 years loan tenure.
The bank will charge transaction fee at 2% of the amount borrowed and Razzaki Bhd
agreed to pay the fee. All transaction fee is to be amortized in full in the first year of
operation. The principal loan repayment is 60% paid at the end of year 5 and the
remaining balance at the end of loan tenure.

The State Government of Johor will grant RM15 million soft loan financing for a 6 years
loan period at the interest rate of 5% per annum with zero processing fee. Razzaki Bhd is
required to pay in one lump sum the principal loan amount at the end of year 6.

The company is subject to a 24% tax rate and its cost of unlevered equity is 12%. The
risk free rate is 4%.

Required:

a) Calculate the Adjusted Present Value of the project for Razzaki Bhd.
(15 marks)

b) Advise whether Razzaki Bhd should undertake the project based on answer in (a)
above.
(2 marks)

c) Discuss on the application of sensitivity analysis in project investment appraisal.

(3 marks)

(Total: 20 marks)

END OF QUESTION PAPER

© HakCiptaUniversitiTeknologi MARA CONFIDENTIAL