solution

Eminence Berhad issues bonds with a 7 percent coupon rate that mature in 15
years. The current market price and par value are RM1,207 and RM1,000,
respectively. The interest is paid annually.
At the same time, the company issues preferred stock at par value of RM10,
which pays 10% annual dividend. The market price of the preferred stock is
RM9 per share; however, the firm will net only RM8 per share.
The company expects to retain RM480,000 of its earning to the following
year. However, if there is a need to issue new shares of common stock, the
selling price is RM3 per share. The flotation cost to issue these new shares is
10% of the selling price per share. The next dividend is expected to be
RM0.15 per share, with constant dividend growth rate of 5 percent per year.
The tax rate applicable to Eminence Berhad is 24%.
On another note, the targeted capital structure of the company is 30% longterm
debt, 10% preferred stock, and 60% equity.
You are required to:
(i) Estimate the cost of debt.
(ii) Estimate the cost of preferred stock.
(iii) Estimate the cost of retained earnings.
(iv) Estimate the cost of newly issued common stock
(v) Due to the unexpected high volatility and uncertainty in the financial
market, the cost of debt is no longer constant. The initially estimated
after-tax cost of debt is only applicable for a total debt of RM300,000.
Beyond this amount of debt, the after-tax cost of debt will be higher at
5%. Calculate the breakpoint of debt, and explain what it means.
(vi) Based on the situation in (v), calculate the weighted average cost of
capital (WACC) when the total amount of new financing is
RM800,000.
Note: Round all the final answers to 2 decimal places.

Eminence Berhad is considering to purchase a new high-speed and innovative
machine that could increase its production capacity in order to meet the rising
demand. The purchase cost of the new machine is RM75,000. An additional
cost of RM5,000 needs to be incurred for the shipping and installation. A
straight-line method is used to depreciate the new machine over its 5-year life
towards zero book value.
Given the company’s strong business foundation and stable performance track
record, its revenues and other operating costs are estimated to be constant
throughout the machine’s useful life. In order to support the machine’s
operation, the company’s accounts receivable and inventory are expected to
increase by RM13,000 and RM6,000, respectively. Meanwhile, the accounts
payable is expected to increase by RM9,000. However, only 70% of the net
working capital could be recovered at the end of the machine’s life.
Other details of the new machine are given below.
Annual sales revenue RM 50,000
Annual operating cost, excluding depreciation RM 25,000
Salvage value RM 10,000
Tax rate 25%
Required rate of return 8%
(i) Calculate the initial outlay.
(ii) Calculate the annual cash flows.
(iii) Calculate the terminal cash flow.
(iv) Calculate the net present value (NPV) and internal rate of return (IRR)
of the new machine. Should Eminence Berhad purchase the machine?