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Question - Mala Bhd is engaged in home improvement product has been listed at Bursa Malaysia with the largest initial public offer in the year 2020. Mala Bhd is committed to expand its business across Malaysia and Brunei with a tagline "Always Low Price" and plans to have 700 stores in both countries in the year 2021. Currently, Mala Bhd is entirely financed by equity with a 50 million unit of shares. The market value traded at price of RM1.60 per share. The firm expects earnings before interest and tax (EBIT) to be RM15 million per year in perpetuity. The corporate tax rate is 24%.
In the year 2021, Mala Bhd plans to finance 35% of its new project partially with debt financing. The cost of the new project worth RM50 million. The firm may issue bonds at 10% pre-tax cost of debt per annum. If this proposal is accepted,
i. Calculate the value of firm.
ii. Calculate the cost of equity (Rs).
iii. Calculate the weighted average cost of capital.
Based on calculation in above, advise Mala Bhd the impact of debt financing in the firm's capital structure?
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