Exercises on WACC Question 1 Nuqman Industries is considering using weighted average cost of capital (WACC) to discount cash flows

in their capital budgeting analyses. The company is seeking your expertise in determining its WACC. It has provided the following information to assist you in your computation: The capital structure comprises long-term debts and equity. Long-term debt of Nuqman Industries comprises two bond issues, both with a RM1,000 face value. The first issue comprises 600,000 bonds with a 13 percent coupon rate, which is currently selling at RM1,097. The bonds pay semi-annually coupon and have 4 years to maturity. The second issue consist of 400,000 zero coupon bonds with 10 years left to maturity. The bonds sell for 45.64 percent of par.

Since no information was given on the equity capital of Nuqman Industries, you surfed the website and managed to get some information on relevant companys key ratios and statistics as shown below:

From your estimation, the beta of Nuqmans equity is 1.2, the T-bills yield 6 percent per year, and the expected return on the market portfolio is 14 percent. The corporate tax rate is 30 percent.

Question 2 Sayong Industries is an established company that has utilised a variety of sources of financing. In addition to common shares outstanding, the company has also issued preferred stocks and bonds to the investing public. The management of Sayong Industries is interested to know their cost of capital so that they can analyse proposals on capital spending in a more prudent manner. Sayong Industries is seeking your expertise in determining its WACC. The market portfolio has a risk premium of 8%, and the risk-free rate is 6%. Corporate tax rate is 30%. Information on the various sources of long-term financing is provided below: Preferred stock: Sayong Industries issued 70,000 preference shares of 6.27 percent 12 years ago. The current price of this RM100 par value share is RM112. Long-term debts: Sayong Industries has two long-term bond issues, both with a RM1,000 face value. The first issue comprises 20,000 bonds with 8% coupon rate. Currently, this bond sells at RM911.33. The bonds pay semi-annual coupon and have 6 years to maturity. The second issue consist of 60,000 bonds with 10 years left to maturity. The bonds sell for 45.64 percent of par. This bond has a debt beta of 0.4.

Common stock: From your estimation, the equity beta of Sayong Industries is 20 percent above that of the market. The most recent figure on the companys market capitalization is RM70,000,000.

A. Calculate the after-tax cost of debt for Sayong Industries. B. Calculate the cost of equity and the cost of preferred stock. C. Compute the WACC of Sayong Industries.
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