QUESTION 1 (CLO 1)

a) Explain the any FOUR (4) importance of capital investment decision for organization with examples. (16 MARKS)

b) Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. Company estimates that, its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax, cost of debt is 12.5 % and tax rate is 20%. Risk free rate (rRF) is 6% and market risk premium is 8%. Calculate the beta of the company. (5 MARKS)

c) A company finances its operations with 40% debt and 60% equity. Its net income is RM16 million and it has a dividend payout ratio of x is 25%. Its capital budget (B) is RM15 million this year. The annual yield on the companys debt (rd) is 10% and the companys tax rate is 30%. The companys common stock trades RM55 per share, and its current dividend is RM5 per share is expected to grow at a constant rate (g) 10% a year. The cost of external equity (F), if it is issued 5% of the amount issued. Calculate the companys WACC. (4 MARKS)