Anekuan  Berhad has identified an investment opportunity and would need additional funding of RM10 million. The extract of the latest statement of financial position is as follows:

Ordinary shares at par value RM1 each : RM3.0 million

Retained earnings :  RM4.0 million

Preferred shares :  RM1.5 million

Long term bank loan at 6% : RM5.0 million

The last closing price of  Anekuan  Berhad’s ordinary shares and preferred shares are RM8.80 per share and RM3.50 per share respectively. The board of directors is planning to pay dividend of RM0.56 per share to the ordinary shareholders and expected to grow at 2% thereafter. The preferred share dividend is fixed at RM0.28 per share. The corporate tax rate is 24%.

The finance director has proposed that the new investment shall be funded by issuing convertible bond at par value of RM100. The coupon rate is 5% per annum and each RM100 bond will be converted into 10 shares when it matures after 10 years. The share price is expected to grow at 2% per annum.

Required:

(a) Calculate the pre-tax cost of debt of the convertible bond. 

(b) Calculate the after-tax weighted average cost of capital of Anekuan  Berhad before the issuance of the convertible bond. 

(c) Calculate the after-tax weighted average cost of capital of Anekuan Berhad after the issuance of the convertible bond.

Answer rating: 100% (QA)

Anekuan Berhads Cost of Capital Calculations Given information Ordinary sharesRM3 million Retained earningsRM4 million Preferred sharesRM15 million Lo... View the full answer