The following information relates to Continental Bhd.: RM'000 Ordinary shares 9% bonds, redeemable in 10 years 7% bonds, redeemable in 6 years Long-term bank loan 20,000 5,000 4,000 1.000 30.000 Question 1 (Continued) Notes: 1. The current ex div market price of the ordinary shares is RM4.50 and Continental Bhd. has just paid a dividend of 45 sen per share. Ordinary share prices and dividends on ordinary shares are both expected to grow by 3% per year for the foresecable future. The current ex interest market price of the 9% bonds is RM105.00 per RM100 bond. The current ex interest market price of the 7% bonds is RM115.00 per RM100 bond and these bonds are convertible into 25 ordinary shares per RM100 bond in 6 years' time. The after-tax interest rate on the long-term bank loan is 5.5% per year. Continental Bhd. pays profit tax at a rate of 30% per year. 2. 3. 4. 5. 6. Required: (i) Calculate the weighted average after-tax cost of capital of Continental Bhd, clearly explaining any assumptions that you have made regarding the convertible bonds. (ii) Critically comment on the impact of using more debts on a company's value.

The following information relates to Continental Bhd.: RM'000 Ordinary shares 9% bonds, redeemable in 10 years 7% bonds, redeemable in 6 years Long-term bank loan 20,000 5,000 4,000 1.000 30.000 Question 1 (Continued) Notes: 1. The current ex div market price of the ordinary shares is RM4.50 and Continental Bhd. has just paid a dividend of 45 sen per share. Ordinary share prices and dividends on ordinary shares are both expected to grow by 3% per year for the foresecable future. The current ex interest market price of the 9% bonds is RM105.00 per RM100 bond. The current ex interest market price of the 7% bonds is RM115.00 per RM100 bond and these bonds are convertible into 25 ordinary shares per RM100 bond in 6 years' time. The after-tax interest rate on the long-term bank loan is 5.5% per year. Continental Bhd. pays profit tax at a rate of 30% per year. 2. 3. 4. 5. 6. Required: (i) Calculate the weighted average after-tax cost of capital of Continental Bhd, clearly explaining any assumptions that you have made regarding the convertible bonds. (ii) Critically comment on the impact of using more debts on a company's value.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter16: Retained Earnings And Earnings Per Share

Section: Chapter Questions

Problem 26P

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