CONFIDENTIAL TAKE HOME ASSIGNMENT 4 (50 marks) Answer ALL questions.

DFN2013 / TFN2013

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(a) Firm U and Firm L are identical in all aspects except for the type of financing mix they employed. Firm U is financed solely by equity capital whereas Firm L finances 30 percent of its assets with debt capital. Each firm has an EBIT of RM1.5 million and an interest rate of 8 percent. In a world without tax, the Weightage Average Cost of Capital (WACC) for Firm U is 12 percent and its value is RM12.5 million. In a real situation, firms profits are subject to 26 percent tax rate. Based on the above information, compare the value and Weightage Average Cost of Capital (WACC) of the levered firm: In a world without tax and in a real world with tax (8 marks) (b) The Kimberly Corporation is a zero growth firm with an expected EBIT of RM100,000 and a corporate tax rate of 30 percent. Kimberly uses RM500,000 of 12 percent debt financing and the cost of equity to an unlevered firm in the same risk class is 16 percent. i. Calculate the value and cost of capital (WACC) of the levered firm with corporate tax. (6 marks) The firm's gain from leverage according to the Miller model is RM126,667. If the effective personal tax rate on stock income is 20 percent, calculate the implied personal tax rate on debt income. (4 marks)

ii.

2.

(a) A non-dividend share is selling for a price RM28 per share. The standard deviation is 0.30. The standard deviation of this share is estimated from returns on the shares during a recent representative historical period. The riskless return is 6 percent. The option has a strike price of RM30. Calculate the value for a 9 month put option on these common shares. (8 marks)

(b)

Kida Consultants currently has 300,000 of common share outstanding. Firm value net of debt is RM3,900,000. Kida has warrant outstanding with an exercise price of RM10. How many warrants must the firm issued if the gain from exercising a single warrant is RM12.97? (3 marks) Charles River Company has just sold a bond issue with 10 warrants attached. The bond have a 20-year maturity, an annual coupon rate of 12 percent and they sold at RM1,000 par value. The current yield on similar straight bonds is 15 percent. Calculate the implied value of each warrant. (5 marks)

(c)

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CONFIDENTIAL (d)

DFN2013 / TFN2013

Samad is interested in purchasing a European call option on Sime Darby Berhad, a non dividend paying common share, with a strike price of RM35 and one year until expiration. Sime Darbys share is currently trading RM37 per share, and the volatility is 35 percent per annum. MG-Bills that mature in one year yield a continuously compounded interest rate of 9 percent per annum. Calculate the price of the call option that Samad is interested in buying by using the Black-Scholes model. (8 marks)

3.

New Hope Bhd attempt to penetrate a new market segment, it proposes to acquire Bali Bhd to get access to large customer base. New Hopes offer involve a total amount of RM10 million or RM4 per share which is a premium of RM1 over Balis current market price. This merger will use common shares as the mode of payment. New Hope currently has a total of 5 million shares outstanding valued at RM40 million, while Bali Bhd has 4.75 million shares outstanding valued at RM8 million. Based on the above information, calculate: (a) (b) (c) Number of shares to be exchange for the merger of Bali Bhd. (3 marks) Share price of the merged firm. (3 marks) How much is the synergy created by this merger? (2 marks)

END OF QUESTION PAPER P/S: Cover page needs to be A (Blue), B (White) and C (Yellow) with font printed is black in color and must consists of project title (capital letters), student name and matrix ID, and program and institution name.

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