Discussion on Questions

Question 9

Jelutong Corporation has developed a new product which is expected to be sold at a price of RM20 per unit. The manufacturing costs include variable cost of RM8 per unit and fixed cost of RM50,000 annually. The initial investment required is RM1.2million and the project has a life of 10 years. The tax rate is 30% and depreciation is on a straight-line basis to zero salvage value. The company’s required rate of return is 12%.

i. Calculate the operating breakeven point (in units sold)

ii. How much annual cash flows need to be generated by the project to reach financial breakeven point?

iii. Determine the number of units of the product to be sold in order to reach the financial breakeven point.

iv. Explain the difference between operating breakeven point and financial breakeven point.

Question 11

You are planning to purchase a business that is currently generating cash flows of RM250,000. As the business is quite risky, you estimate an appropriate required rate of return of 16%. Since you are not sure the pattern of cash flows that will be generated by the business, you need to determine the firm’s value under different growth rate assumptions.

Determine the firm’s value under if cash flows are expected to grow at:

i. 0% rate

ii. 5% from now until infinity

iii. 8% for the first years, followed by a constant rate of 5% from year 4 until infinity.

Question 12

Information on the capital components of the Rye Corporation is as follows:

Capital source | Proportion | After-tax cost |

Debt | 25% | 5% |

Preferred stocks | 15% | 9% |

Common stocks | 60% | 13% |

The company’s most recent earnings available to common stockholders was RM420,000 and its dividend payout ratio was 30%. The cost of new common stock financing is expected to be 16%.

Estimate for the Rye Corporation:

i. The breakpoint in total financing associated with exhaustion of retained earnings.

ii. The weighted marginal cost of...