Question

Seacera Tiles Corp is considering the following average risk projects for its next
investment period:
Project IRR (%) Investment (RM)
A 11.90 2,000,000.00
B 11.25 2,500,000.00
C 12.17 3,000,000.00
D 11.72 1,500,000.00
E 11.03 2,000,000.00

Seacera has 10,000 bonds outstanding that were issued for 30 years ten years ago at a par
value of RM1,000.00 and a coupon rate of 12%, with interest paid semi-annually. Similar
bonds are now selling to yield 9%. Tax rate is 40%.
It issued 40,000 shares of 6% preferred stock at an RM100.00 par value eight years ago.
Those preferred shares are now selling to yield 10%, and are subject to an 8% flotation
cost.
There are currently 2,500,000 of common stock outstanding selling for RM11.60 a share.
Expected dividend to be paid is RM0.93 per share and dividends are expected to grow at
the rate of 6%.
Develop Seacera’s market value based capital structure, calculate its WACC. Assume
equity capital comes from retained earnings. Based on the WACC estimates calculated,
which project/s if any, would be selected and what is the total investment/s for the next
planning period?

N.B. Use 2-decimal places for all calculations.

Answer 1

After tax cost of bond	YTM*(1-tax rate)	9*(1-.4)	5.4
cost of preferred stock = preferred dividend/net proceeds from the issue	6/55.2		10.87%
market price = preferred dividend/cost of preferred stock	6/10%	60
net proceeds = market price*(1-flotation cost)	60*(1-.08)	55.2
cost of common stock = (expected dividend/market price)+growth rate	(.93/11.60)+6%		14.02%
Market value of debt =Using present value function in MS excel	rate = 9/2 = 4.5% nper =20* 2= -40 pmt = 1000*6% = 60 fv =-1000 type =0	PV(4.5%,40,-60,-1000,0)	$1,276.02
market value of bond	1276.02*10000	12760200
market value of preferred stock	40000*60	2400000
market value of common stock	2500000*11.60	29000000
WACC
source	value	weight	cost	weight*cost
market value of bond	12760200	0.288952496	5.4	1.5603435
market value of preferred stock	2400000	0.05434758	10.87	0.5907582
market value of common stock	29000000	0.656699924	14.02	9.2069329
total	44160200	WACC = sum of weight*cost		11.36
Project	Investment	IRR	WACC	if IRR is greater than WACC accept if less then reject
A	2000000	11.9	11.36	Accpet
B	2500000	11.25	11.36	reject
C	3000000	12.17	11.36	Accpet
D	1500000	11.72	11.36	Accpet
E	2000000	11.03	11.36	reject
Project Accepted
A	2000000
C	3000000
D	1500000
total investment amount for next period	6500000