Fin 242
Answer all question (TEST 2)
Question 1
a) Smart Corporation has to raise RM5,000,000 for its 5-year budget. The corporation has the following three (3) financial sources to be considered:
Source I
Issue preferred shares that pays 10% dividend on par value of RM100. The current market price of the preferred share is RM75 per share and its floatation cost is at 5% of the par value.
Source II
Issue bonds that pay 8% interest and mature in ten years. The corporation is planning to sell the bonds at 5% discount. The underwriting fee is 3% of the selling price. The current tax rate is 40%.
Source III
Issue common shares at RM40. The corporation has just paid RM1.75 per share dividend and the dividend is expected to grow at a constant rate of 6% indefinitely.
Floatation cost is 2.5% of the selling price.
Calculate:
i) The after-tax cost of debt(5 marks)
ii) The after-tax cost of common shares (4 marks)
iii) The after-tax cost of preferred shares (3 marks)
iv) Which one is the best source of financing? Why? (2 marks)
b) Write short notes on the following:
i) Negotiable Certificate of Deposits (NCDs) (2 marks)
ii) Liquidity risk (2 marks)
iii) Yield to maturity(2 marks)
Question 2
a) Shazlan wants to buy RM850.000 commercial paper. Bank EDC agrees to sell the commercial papers that mature in 180 days at an interest rate of 9% annually. The bank charges a total placement fees of RM30,000. Calculate the effective interest rate. (3 marks)
b) Sweet Inc. needs to raise RM500,000 in short term loan for six months. The company has a line of credit of RM800,000 with 2.5% commitment fees on the unused fund, and a 9% stated interest rate. A compensating balance of RM40,000 is to be kept in its checking account. Sweet Inc. has RM28,000 checking account balance that can be used to meet part of the compensating balance requirement. What is the effective interest rate? (5 marks)
c) PTC Superstore is trying to determine whether or not to
Question 1
a) Smart Corporation has to raise RM5,000,000 for its 5-year budget. The corporation has the following three (3) financial sources to be considered:
Source I
Issue preferred shares that pays 10% dividend on par value of RM100. The current market price of the preferred share is RM75 per share and its floatation cost is at 5% of the par value.
Source II
Issue bonds that pay 8% interest and mature in ten years. The corporation is planning to sell the bonds at 5% discount. The underwriting fee is 3% of the selling price. The current tax rate is 40%.
Source III
Issue common shares at RM40. The corporation has just paid RM1.75 per share dividend and the dividend is expected to grow at a constant rate of 6% indefinitely.
Floatation cost is 2.5% of the selling price.
Calculate:
i) The after-tax cost of debt(5 marks)
ii) The after-tax cost of common shares (4 marks)
iii) The after-tax cost of preferred shares (3 marks)
iv) Which one is the best source of financing? Why? (2 marks)
b) Write short notes on the following:
i) Negotiable Certificate of Deposits (NCDs) (2 marks)
ii) Liquidity risk (2 marks)
iii) Yield to maturity(2 marks)
Question 2
a) Shazlan wants to buy RM850.000 commercial paper. Bank EDC agrees to sell the commercial papers that mature in 180 days at an interest rate of 9% annually. The bank charges a total placement fees of RM30,000. Calculate the effective interest rate. (3 marks)
b) Sweet Inc. needs to raise RM500,000 in short term loan for six months. The company has a line of credit of RM800,000 with 2.5% commitment fees on the unused fund, and a 9% stated interest rate. A compensating balance of RM40,000 is to be kept in its checking account. Sweet Inc. has RM28,000 checking account balance that can be used to meet part of the compensating balance requirement. What is the effective interest rate? (5 marks)
c) PTC Superstore is trying to determine whether or not to