The finance director of Delta Bhd is trying to determine the cost of equity capital. The company had paid a dividend of RM0.75. The company also reported a stable growth of 15% per annum and expected to grow at the same rate in the near future. The company is currently trading at market price of RM5.50. Calculate the cost of equity capital for Delta Bhd.

The finance director of Delta Bhd is trying to determine the cost of equity capital.
The company had paid a dividend of RM0.75. The company also reported a
stable growth of 15% per annum and expected to grow at the same rate in the
near future. The company is currently trading at market price of RM5.50.
Calculate the cost of equity capital for Delta Bhd.

 

Question 4 [Total 25 marks]
(a) Simon is considering an investment of RM25,000 involving two stocks from
Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange). Genting
stock has a beta of 0.80, whereas IOI stock has a beta of 1.2. Based on the
information collected, he intends to invest RM15,000 in Genting stock, with the
balance in Sunway stock. Currently, the T-Bill rate is 3% pa, while the market
has been offering 15% return.
Required:
(i) Calculate the expected return of the portfolio consisting of the two stocks
according to the CAPM model. (6 marks)
(ii) Based on the information provided in the table for the five stocks for
Malaysian companies:
Stock Code Company Name Beta (βi) Annual
Return (Ri)
1001 Camelin Bhd 1.36 18.0%
5098 BHL Bhd 0.86 15.5%
4035 Southern Bhd 1.17 17.0%
3072 Rand Steel 0.47 9.2%
(1) Calculate the required rate of return (ki) for each company using the
CAPM model. Based on your answers, evaluate and recommend which
securities are worth investing in. (9 marks)
(b) According to the CAPM, the expected return on a risky asset depends on three
components. Describe each component, and explain its role in determining
expected return. (9 marks)
Sunway University Business School Sample FIN2014/BMB2207 Final Examination
Page 5 of 9
Question 5 [Total 25 marks]
(a) Russell Bhd is a public listed company with a market capitalization of RM1 billion
and 40 million shares outstanding. Following the appointment of the new CEO,
the company plans to distribute a sum of RM125 million through an open market
repurchase (you may assume perfect capital markets).
Required:
(i) Calculate the price per share of Russell Bhd prior to the repurchase.
(3 marks)
(ii) Calculate the amount of shares that will be repurchased under this corporate
exercise. (3 marks)
(iii) Determine the price per share following the share repurchase. (2 marks)
(b) Arddy Bhd has conducted their meeting last week. The company will pay a
dividend of RM2.20 per share at the end of this year and RM2.30 per share next
year. Based on your analysis, you expect the company stock price will increase
to RM38.50 in two years. Assuming that the Arddy Bhd’s equity cost of capital is
10%.
Required:
(i) Calculate the price that you would be willing to pay for a share of Arddy
today, if you planned to hold the stock for two years. (3 marks)
(ii) Calculate the price that you would be willing to pay for the same share if you
intend to hold the stock for the long-term. (4 marks)
(c) Discuss the differences between permanent working capital and temporary
working capital. (5 marks)
(d) The finance director of Delta Bhd is trying to determine the cost of equity capital.
The company had paid a dividend of RM0.75. The company also reported a
stable growth of 15% per annum and expected to grow at the same rate in the
near future. The company is currently trading at market price of RM5.50.
Calculate the cost of equity capital for Delta Bhd. (5 marks)


 

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