Question 2
1. A bond is expected to mature in 10 years with an RM1,000 face value. Given that the annual coupon payment is at the rate of 3%, and the expected rate of return is 7%. Compute the value of the bond that the New Wave will be received.
2. Next Gen Corporation plans to issue 30 million shares with a market value of RM1.00 per share, and RM20 million will be debt financing through bonds. The equity beta of the firm is 1.5. The yield on risk-free investment is 3% per year and the market risk is approximately 10% per year. The market risk premium is 7%. The par value and market value of each bond are RM1,000. The bond’s annual interest payment before tax is 5%. The firm pays taxation at the annual rate of 30%.
From the above information, you are required to:
1. The after-tax cost of debt.
2. The cost of the firm’s equity.
3. The weighted average cost of capital is based on your answers in parts (i) and (ii).
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