The board of directors of Cempaka Oil Berhad is considering investing in a new palm oil refinery. To evaluate the financial feasibility of the new palm oil refinery, they have sought your assistance to compute their weighted average cost of capital (WACC) to be used as a discount rate in the investment appraisal exercise. You have been provided with the following information: Equity – Number of Ordinary shares 36 million 3% Preference shares (nominal value of RM1 per share) RM11 million 6% Coupon 5-year bonds (par value RM1,000 each) RM15 million Long-term loan (variable rate) RM4 million The current share price of ordinary shares is RM2.50 each. Cempaka Oil Berhad’s has just paid an ordinary dividend of 28 sen per share. The company pays out 40% of its earnings as dividends and is expected to continue this policy going forward. Dividends are expected to grow at 9.24% annually. The current market price of the preference shares is 70 sen per share. The 6% coupon bonds have a current market price of RM1,000. Coupon payments are made semi-annually, and the bonds mature in 4 years. Cempaka Oil Berhad obtained the long-term loan from BHL Islamic Bank (BHILB). The current Base Rate (BR) of BHLIB is 6.85%. The long-term loan is charged at BR + 0.5% per annum. Cempaka Oil Berhad’s corporate tax rate is 25%, the expected return on the new palm oil refinery is 15.4% and it is 30 th September 2020 now. Calculate Cempaka Oil Berhad’s weighted average cost of capital (WACC) as at 30 th September 2020 based on the information provided above. Should Cempaka Oil Berhad invest in the new palm oil refinery?
The board of directors of Cempaka Oil Berhad is considering investing in a new palm oil
refinery. To evaluate the financial feasibility of the new palm oil refinery, they have sought your
assistance to compute their weighted average cost of capital (WACC) to be used as a discount
rate in the investment appraisal exercise.
You have been provided with the following information:
Equity – Number of Ordinary shares 36 million
3%
6% Coupon 5-year bonds (par value RM1,000 each) RM15 million
Long-term loan (variable rate) RM4 million
The current share price of ordinary shares is RM2.50 each. Cempaka Oil Berhad’s has just paid
an ordinary dividend of 28 sen per share. The company pays out 40% of its earnings as dividends
and is expected to continue this policy going forward. Dividends are expected to grow at 9.24%
annually. The current market price of the preference shares is 70 sen per share.
The 6% coupon bonds have a current market price of RM1,000. Coupon payments are made
semi-annually, and the bonds mature in 4 years. Cempaka Oil Berhad obtained the long-term
loan from BHL Islamic Bank (BHILB). The current Base Rate (BR) of BHLIB is 6.85%. The
long-term loan is charged at BR + 0.5% per annum.
Cempaka Oil Berhad’s corporate tax rate is 25%, the expected return on the new palm oil
refinery is 15.4% and it is 30 th September 2020 now.
Calculate Cempaka Oil Berhad’s weighted average cost of capital (WACC) as at 30 th September
2020 based on the information provided above. Should Cempaka Oil Berhad invest in the new
palm oil refinery?
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