There are THREE (3) questions in this section. Answer ALL questions.(40 Marks)

Question 1

a.i.Calculate the value of the bond that Cloud Corporation will receive when the bond isexpected to mature in 20 years with a RM1,000 face value. Given that the annual coupon payment is at the rate of 5.5%, and the expected rate of return is 3.5%.

ii.Based on answer (a. i), explain the relationship between expected rate of return andcoupon payment rate.

b.Cloud Corporation also plans to issue 20 million shares with a market value of RM2.4 per share, and RM32 million will be a debt financing through bonds. The par value and market value of each bond is RM1,000. The bond annual interest payment before tax is 6%. The equity beta of firm is 1.2. The yield on risk free investment is 2.5% per year and the market risk is approximately at 12% per year. The firm pays taxation at the annual rate 30%.

From the above information, you are required to:

i.The after -tax cost of debt.

ii.The cost of firm's equity.

iii. The weighted average cost of capital based on your answers in part (i) and (ii).

Question 2

Thunder Corporation is considering an investment in one of two common stocks. The aftertax cash flows for projects L and V are listed below.

Year Cash Flow l Cash Flow v

0 (7000) (70000)

1 1,800 0

2 (2,500) 0

3 1,800 0

4 4,800 0

5 3,800 11,000

Assuming the expected rate of return on the investment is estimated at 8%.

Required:

a.calculate the payback period for each project.

b.calculate the net present value for each project.

c.based on the two investment techniques, which project should be accepted?

Question 3

Thunder Corporation is considering investing in security market. The company need to choose only one from the two securities listed below. The return are as follows:

RETURN

Probability SECURITY T SECURITY V

40% 10% 8%

25% 7% 5%

35% 8% 7%

Based on the above information, you are required to:

a.calculate the expected rate of return for each security.

b.calculate the standard deviation of return for each security.

c.explain the most preferable security.