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Anekuan Berhad has identified an investment opportunity and would need addition...
May 25, 2024
Solution by Steps
step 1
The coupon rate of the bond is given as 5%5\% per annum
step 2
The pre-tax cost of debt is simply the coupon rate for the bond
step 3
Therefore, the pre-tax cost of debt is 5%5\%
Answer
5%
(b) Calculate the after-tax weighted average cost of capital of Anekuan Berhad before the issuance of the convertible bond.
step 1
Calculate the market value of equity (ordinary shares): 3.0 million shares×RM8.80=RM26.4 million3.0 \text{ million shares} \times \text{RM} 8.80 = \text{RM} 26.4 \text{ million}
step 2
Calculate the market value of preferred shares: 1.5 million shares×RM3.50=RM5.25 million1.5 \text{ million shares} \times \text{RM} 3.50 = \text{RM} 5.25 \text{ million}
step 3
Calculate the market value of debt (long term bank loan): RM5.0 million\text{RM} 5.0 \text{ million}
step 4
Calculate the total market value: RM26.4 million+RM5.25 million+RM5.0 million=RM36.65 million\text{RM} 26.4 \text{ million} + \text{RM} 5.25 \text{ million} + \text{RM} 5.0 \text{ million} = \text{RM} 36.65 \text{ million}
step 5
Calculate the cost of equity using the Gordon Growth Model: RM0.56RM8.80+0.02=0.084+0.02=0.104 or 10.4%\frac{\text{RM} 0.56}{\text{RM} 8.80} + 0.02 = 0.084 + 0.02 = 0.104 \text{ or } 10.4\%
step 6
Calculate the cost of preferred shares: RM0.28RM3.50=0.08 or 8%\frac{\text{RM} 0.28}{\text{RM} 3.50} = 0.08 \text{ or } 8\%
step 7
Calculate the after-tax cost of debt: 6%×(1−0.24)=4.56%6\% \times (1 - 0.24) = 4.56\%
step 8
Calculate the weighted average cost of capital (WACC):
step 9
WACC = (RM26.4RM36.65×10.4%)+(RM5.25RM36.65×8%)+(RM5.0RM36.65×4.56%)\left(\frac{\text{RM} 26.4}{\text{RM} 36.65} \times 10.4\%\right) + \left(\frac{\text{RM} 5.25}{\text{RM} 36.65} \times 8\%\right) + \left(\frac{\text{RM} 5.0}{\text{RM} 36.65} \times 4.56\%\right)
step 10
WACC = 0.075+0.011+0.006=0.092 or 9.2%0.075 + 0.011 + 0.006 = 0.092 \text{ or } 9.2\%
Answer
9.2%
(c) Calculate the after-tax weighted average cost of capital of Anekuan Berhad after the issuance of the convertible bond.
step 1
Calculate the new market value of debt including the convertible bond: RM5.0 million+RM10.0 million=RM15.0 million\text{RM} 5.0 \text{ million} + \text{RM} 10.0 \text{ million} = \text{RM} 15.0 \text{ million}
step 2
Calculate the new total market value: RM26.4 million+RM5.25 million+RM15.0 million=RM46.65 million\text{RM} 26.4 \text{ million} + \text{RM} 5.25 \text{ million} + \text{RM} 15.0 \text{ million} = \text{RM} 46.65 \text{ million}
step 3
Calculate the new weighted average cost of capital (WACC):
step 4
WACC = (RM26.4RM46.65×10.4%)+(RM5.25RM46.65×8%)+(RM15.0RM46.65×4.56%)\left(\frac{\text{RM} 26.4}{\text{RM} 46.65} \times 10.4\%\right) + \left(\frac{\text{RM} 5.25}{\text{RM} 46.65} \times 8\%\right) + \left(\frac{\text{RM} 15.0}{\text{RM} 46.65} \times 4.56\%\right)
step 5
WACC = 0.059+0.009+0.015=0.083 or 8.3%0.059 + 0.009 + 0.015 = 0.083 \text{ or } 8.3\%
Answer
8.3%
Key Concept
Weighted Average Cost of Capital (WACC)
Explanation
WACC is the average rate of return a company is expected to pay its security holders to finance its assets. It is calculated by weighting the cost of each type of capital (equity, debt, preferred shares) by its proportion in the overall capital structure.
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