Question: TOPIC: CAPITAL STRUCTURE Subtopic: Capital Structure Policy Statement: The Finance Director Of ATC Bhd, Miss Kay, Has Heard That The Market Value Of The Company Will Increase If The Weighted Average Cost Of Capital Is Decreased. Miss Kay Proposed To Decrease The Weighted Average Cost Of ATC Bhd By Issuing RM40 Million Bonds At Their Nominal Rates Of …

TOPIC: CAPITAL STRUCTURE
Subtopic: Capital Structure Policy

Statement:
The finance director of ATC Bhd, Miss Kay, has heard that themarket value of the company will increase if the weighted averagecost of capital is decreased. Miss Kay proposed to decrease theweighted average cost of ATC Bhd by issuing RM40 million bonds attheir nominal rates of RM100 per bond. The bonds would pay annualinterest of 8%. The bonds will be redeemed at 10% premium tonominal value after 10 years.

Question:
Discuss whether the director’s view (Miss Kay) that issuing tradedbonds will decrease the weighted average cost of capital ATC Bhdand thereby increase the value of the company. Discussion shouldconsider from viewpoint of:
(a) Traditional
(b) Modigliani & Miller

(20 marks)