CONFIDENTIAL AC/NOV 2019/MAF603

UNIVERSITI TEKNOLOGI MARA

COMMON TEST 2

COURSE : CORPORATE FINANCE

COURSE CODE : MAF603
TEST : NOV 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

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CONFIDENTIAL AC/NOV 2019/MAF603

QUESTION 1

Bister Bhd is one of the leading safety boots factory in Malaysia, specializes in

manufacturing the most comprehensive safety boots product-line for a global market. The
company has a perpetual earning after tax (EAT) of RM75 milllion. Currently, the firm has
no debt obligation. As the firm is all equity, the shareholders demand a 15% required rate
of return. The corporate tax rate is 25%.

Required:

a. If the market share price Bister Bhd is RM2.50 per units, determine the following:

i. Value of the company.

ii. Cost of equity.

iii. Amount of tax payment.

iv. Total units of the company’s outstanding shares.

(5 marks)

b. The Chief Financial Officer (CFO) of Bister Bhd has proposed to issue an additional
debt to buy back 80 million units of its equity resulting in a debt to equity ratio
increase to 4/7. With a pre-tax cost of debt at 6%, it is expected that the annual
interest payments on the additional debt is RM12 million.

Determine the following:

i. New value of the firm.

ii. Value of its equity.

iii. Cost of equity.

iv. Overall cost of capital of the firm.

v. Market share price per unit

(10 marks)

c. Advise whether the CFO of Bister Bhd should proceed with the proposal based on
the changes (if any) to the value of the company, the required rate of return to the
equity shareholders, overall cost of capital and the market share price of the
company.
(5 marks)

(Total: 20 marks)

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CONFIDENTIAL AC/NOV 2019/MAF603

QUESTION 2

Canopy Hill Bhd (CHB) is thinking to invest in a property development project in Hill Park
worth RM15 million which requires 5 years to complete. The project will generate net pre-
tax earnings amounting to RM4.5 million each year throughout the life of project. The
basis of depreciation applies on this project is a straight-line method. The corporate tax
rate and the risk free rate is 25% and 10% respectively whilst the cost of all equity for the
unlevered firm is 24%.

CHB has tried to get financial assistance and able to obtain two financing options such as
follows:

1. Public Bank Berhad

Public Bank Berhad has agreed to finance partially amounting to RM10 million to
CHB for a loan period of 5 years. The interest rate charge by the bank loan is at
12% per annum. The repayment of loan principal will be in one full settlement at
the end of the loan tenure. Public Bank Berhad also will charge upfront 1% of
flotation cost from the loan gross proceed. CHB requests the bank to absorb the
flotation cost into the loan amount. This flotation cost is to be amortized over the
loan duration.

2. Government Assistance

The Housing Ministry would like to offer CHB a soft loan under the National
Housing Fund amounting to RM10 million for a period of 5 years at the interest
rate of 5% per annum. CHB is required to pay the principal loan, an equal amount
of installment at the end of every year until the loan period ended.

Required:

a) Calculate the Adjusted Present Value (APV) of the project for CHB for each
options.
(15 marks)

b) Advise which option should CHB undertake base on answer in (a) above.
(2 marks)

c) One of the criticisms of Net Present Value (NPV) analysis is it may sometimes
create the “false sense of security” which contribute to the weaknesses of
Sensitivity Analysis.

Explain the phrase “false sense of security” in Net Present Value analysis and
Sensitivity Analysis.
(3 marks)

(Total: 20 marks)

END OF QUESTION PAPER

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