QUESTION 2

(a) SunTech Bhd is a company that owns several technology stores in Malaysia. They are considering opening a new store in Penang taking advantage of the proximity to a university campus. This project is financed with a zero–coupon bond with a market value today of RM291.26 million. The bond matures in one year. The project will generate a cash flow in two years of either RM300 million with a probability of 60% or RM280 million with a probability of 0.4%. The yield to maturity of the bond is 3% annually. Assume investors are risk neutral.

Calculate;
(i) The face value of debt.
(ii) Annual return demanded by investors

Explain;
(iii) The difference between yield to maturity and cost of debt (Rd)
(iv) Advantages of financing this project with equity instead of debt

(b) Your investment portfolio consists of RM15,000 invested in only one stock, Roof Berhad. The risk–free interest is 5%. The expected return is 12% and standard deviation of 40% for Roof Berhad. The market portfolio has an expected return of 10% and a standard deviation of 18%. The CAPM conditions are all verified.
(i) Graph the position of Roof Berhad and market portfolio in Capital Market
Line (CML).
(ii) Calculate the systematic risk and idiosyncratic risk of Roof Berhad.

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