Revision Questions

A pharmaceutical company require RM15 million capital investment to expand its current
production and R&D facilities. There are two options to finance this expansion and these are: (1)
RM15 million issuance of common share that will cost the company 12 percent from the amount
raised. The expected cost of equity is at 25%; and (2) RM15 million of long-term debt with
issuance cost is 3 percent and the expected cost of debt is at 10 percent. The tax rate is 22%.
Determine the optimal capital structure based on you own assumption with respect to the
equity/debt ratio.

Refer to the following financial information:

Net Income/Earnings = RM20 million

Dividend Paid out = RM9.5 million
Price Per Share 2018 = RM0.75
Dividend Per Share 2018 = RM0.36
Company Beta = 0.90
Risk Free Rate = 3.5%
Market Return = 8.5%
Company’s ROE = 19%

i. Determine the company’s cost of equity.

ii. Wat is the company expected growth rate?
iii. Given the assumption that the firm will be in stable growth after 5 years, growing at 3
percent annually and its ROE reduce to a reasonable rate at 12 percent in perpetuity.

Value the firm in per share basis.

You have been asked to value Sonata Inc., a manufacturer of musical instruments for computers.
The company has estimated is free cash flows to equity and its cost of equity for the next four
years
Year 1 2 3 4
EPS 1.50 1.80 2.16 2.59
FCFe/share -2.00 -1.20 0.34 0.09

The earning per share are expected to grow 6 percent per year after year 4, and the net capital
expenditures are expected to decline 50 percent after year 4. Sonata currently has a beta of 1.5 and
no debt or working capital needs but expects its beta to drop to 1 after year 4. The debt ratio will
remain at 0 percent. The Treasury Bond rate is 7 percent and market risk premium is 5.5 percent.
i. Estimate the terminal value of equity per share
ii. Estimate the value per share today

You have been asked to do a discounted cash flow valuation of a firm and have been given the
following partial inputs to the valuation
Year 1 2 3 4
Growth Rate 20% 20% 20% 5%
EBIT(1-t) 100 120 144 151.2

Cost of Equity 15.00% 14.50% 14.00% 12.50%

Cost of Debt 7% 7% 7% 7%
Debt Ratio 10% 20% 30% 40%

Return on Capital 25% 25% 25% 15%

The company has a tax rate of 40%.

Estimate the value of firm today.