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EBIT | RM150 million | Interest Expense | RM 20 million | Taxable Income | RM130 million | Taxes | RM 52 million | Net Income | RM 78 million |

The current risk-free rate is 8% and the market risk premium is 5.5%.

i. What is the firm's current weighted average cost of capital?

(3 marks) Market Value of Equity =Share Outstanding * Price per Share = 40 million * $ 20 = 800

Cost of Equity = Risk Free Rate + AVG Beta (Market Risk Premium Rate)

=8% + 1.15 (5.5%) = 14.33%

Cost of Capital = Cost of Equity (Risk Free Rate) + YTM (1- Tax Rate)(Debt Portion) = 14.33% (0.8) + 10% (1-0.4) (0.2) = 12.66%

Therefore WACC = 12.66%. This value can be used to discount any project

ii. The firm is proposing borrowing an additional RM200 million in debt and repurchasing stock. If it does so its rating will decline to A, with a market interest rate (yield to maturity) of 12%. What will the weighted average cost of capital be if they make this move?

(3 marks)

New Market Value of Equity = RM800 Million – RM200 Million = RM600 Million

If the firm borrows RM 200 million repurchase stock, Equity will drop to RM 600 million

New Debt/Equity Ratio = Debt Value / Equity Value = 400/600 = 0.67

Unlevered Beta = AVG Beta / (1+ Equity Portion * Old Debt Equity Ratio) = 1.15 / (1 + 0.6*0.25) = 1.00

New Beta = Unlevered Beta (1+Equity Portion * New Debt…...

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