a) Write a brief introduction on the two (2) selected companies.

Justify and support your

choice on why the companies are appropriate to be used as a reference for calculating
cost of capital (or discount rate), and analysing capital budgeting for YTLs new
project in plantation industry.
IJM Plantation Berhad (IJMP) is an oil palm agribusiness company based in
Sabah, Malaysia. The company represents one of the five main divisions of IJM
Group. It was listed on the main board of Bursa Malaysia Securities Berhad in July
2003. IJM Plantation Berhad started at the year 1985 when it formed a joint venture
with Koperasi Pembangunan Desa to develop Desa Talisai. Years later, the area under
oil palm cultivation in IJMP has increased over 7 folds to its present land-bank of
approximately 30,000 hectares in the Sandakan and Sugut region in Sabah, Malaysia.
The company has also expanded their business to Indonesia for oil palm cultivation.
IJMP owns and operates 11 oil palm estates, and complemented by 4 palm oil mills.
The companys oil palm estates and the state-of-the-art processing mills consistently
produce results above the industrys average.
Kluang Rubber Company (Malaya) Berhad was incorporated on 5 th May 1959
and was listed on the Main Market of Bursa Malaysia Securities Berhad.

The

company is a public limited liability company, incorporated and is based in Malaysia.

The production and sale of fresh oil palm fruit bunches (FFB) are the main activities
of Kluang Rubber Co (M) Berhad. As at 30 th June 2014, the company owns 1,598
acres of oil palm estate located in Kluang, Johor. The company is also a long-term
portfolio investor in securities, and has both associates and subsidiaries involved in
the businesses of investment holdings and oil palm plantation operations.
IJM Plantation Berhad and Kluang Rubber Company (Malaya) Berhad are
chosen as reference because both companies are well-known and experienced in the
plantation field as they have been in the field for years, and have been listed on the
main board of Bursa Malaysia Securities Berhad. Their companies annual reports are
reliable to portray and interpret the industrys condition. Therefore, IJM Plantation
Berhad and Kluang Rubber Company (Malaya) Berhad will be great references for
YTL in calculating their cost of capital and analyzing their capital budgeting.

c) Go to www.finance.yahoo.com OR http://www.reuters.com/finance/stocks and enter

the ticker symbol for the selected company. What is the Debt to Equity Ratio (DE)
and equity beta for each company available in the database?
IJM Plantations Bhd (IJMP.KL)
2015
Total Debt to Equity (MRQ)
Beta

45.40
0.98

2013
Debt to equity ratio = Total liabilities
Total Equity
= 92904
1142886
= 0.0813
Equity Beta = Beta (1 + Total liabilities)
Total Equity
= 0.98(1+0.0813)
= 1.059674
Kluang Rubber Company Malaya Bhd (KLRK.KL)

Total Debt to Equity (MRQ)

Beta

0.00 2013
0.99

2013
Debt to equity ratio = Total liabilities
Total Equity
= 1186509
129937063
= 0.0091

Equity Beta = Beta (1 + Total liabilities )

Total Equity
= 0.99(1+0.0091)
= 0.999009

References
http://www.reuters.com/finance/stocks/financialHighlights?symbol=IJMP.KL
http://www.reuters.com/finance/stocks/financialHighlights?symbol=KLRK.KL
d) Calculate the asset beta for each selected company and find the average.
IJM Plantations Bhd (IJMP.KL), 2013
Asset Beta, Beta asset=Beta equity= Beta asset [1+(D/E)(1-TC)]
Beta Equity= Beta asset[1+(1-TC)(D/E)]
Beta equity= Beta asset [1+(D/E)(1TC)]
1.059674= Beta asset [1+(0.0813)(1-0.28)]
1.059674= Beta asset (1.0585)
1.059674/1.0585= Beta asset
Beta asset= 1.0011

Kluang Rubber Company Malaya Bhd (KLRK.KL),2013

0.999009= Beta asset [1+(0.0091)(1-0.28)]
0.999009= Beta asset (1.0066)
0.999009/1.0066= Beta asset
Beta asset= 0.9925

Average beta asset for 2013= ( Asset beta IJMP.KL+ KLRK.KL)/2

= (1.0011+0.9925)/2
= 1.9936/2
= 0.9968

e) Assume that the risk free rate is 3% and the expected return on market portfolio is 8%
for YTL BHD. Determine the appropriate discount rate for YTLs new project in
plantation industry. Justify your recommendation.
E
D
WACC = D+ E Re + V Rd (1-TC)
KLUANG RUBBER COMPANY (MALAYA) BERHAD
412,258,776
1,203,287
WACC = 1,203,287+ 412,258,776 0.080055 + 413,462,063

1.584

(1-0.28)

= 0.083 @ 8.3%
*Re = Cost of Equity, Es = Rf + Bs (Emkt Rf)
3% + 1.0011 (8% - 3%) = 0.080055
**Rd = Cost of Debt, Rd (1-tc)
2.20 (1 0.28) = 1.584
IJM PLANTATIONS BHD
1,396,266
WACC = 746,236+1,396,266

0.079625 +

746,236
2,142,502

0.864 (1-0.28)

= 0.27 @ 27%
*Re = Cost of Equity, Es = Rf + Bs (Emkt Rf)
3% + 0.9925 (8% - 3%) = 0.079625
**Rd = Cost of Debt, Rd (1-tc)
1.2 (1 0.28) = 0.864
Recommendation
From the result of discount rate for both company, we highly recommended discount
rate of IJM Plantation Bhd the company has quite a high percentage of discount rate
at 27% compared to Kluang Rubber Company (Malaya) Berhad at 8.3% which its
benefit to use Kluang Rubber Company discount rate which it gives high number of
discount at the purchases of investment.

Formula
Re = Cost of Equity (CAPM)
Rd = Cost of Debt
E = Market Value of the Firm Equity/ Total Equity
D = Market Value of the Firm Debt/ Total Liabilities
V = E+D
E/V = Percentage of Financing that is Equity
D/V = Percentage of Financing that is Debt
TC = Corporate Tax Rate

f) The cash flows associated with YTLs new plantation project are as follow:
Year

Cash Flow in (RM)

-600,000

120,000

145,000

170,000

190,000

220,000

IJM Plantations Berhad

Discounted rate, r = 8.3%
Cash

Flow

Year

(RM)

Discounted (RM)

Accumulative (RM)

-600,000

120,000

110,803.32

489,196.68

145,000

123,626.36

365,570.31

170,000

133,833.10

231,737.21

190,000

138,114.66

93,622.55

220,000

147,665.96

-54,043.41

Payback Period, PP = 4 Years + (93,622.55/147,655.96)

= 4.63 Years
*Net Present Value, NPV = 54,043.41
**Internal Rate of Return, IRR = 11.35%
Kluang Rubber Company (Malaya) Berhad
Discounted rate, r = 27%
Year

Cash Flow

-600,000

Discounted

Accumulative

120,000

94,488.19

505,511.81

145,000

89,900.18

415,611.63

170,000

82,992.29

332,619.34

190,000

73,036.29

259,583.05

220,000

66,589.24

192,993.80

Payback Period, PP = More than 5 years

*Net Present Value, NPV = -192,993.80
**Internal Rate of Return, IRR = 11.35%

Explanation
From the data collected IJM Plantations Berhad is taken as a guide compare to the Kluang
Rubber Company (Malaya) Berhad . The payback period taken to recover the initial
investment is shorter which is taken around 4. 63 years compare to 5 years payback period by
Kluang Rubber Company (Malaya) Berhad. The net present value shows that IJM Plantations
Berhad is positive value that is RM54, 043.41 to be accept while on the other hands the
Kluang Rubbber Company (Malaya) shows a negative value of (RM192, 993.80) to reject.
Both of the companies have the same Internal Rate of Return that is 11.35% and no
difference to compare.
Formula:
*NPV = CF0 +

CF1 + . . . + CFn
(1 + r)1

**IRR = ra + NPVa

(1+r)n
+ (rb - ra)

NPVa- NPVb

ra = Lower discount rate chosen

rb = Higher discount rate chosen
Na = NPV at ra
Nb = NPV at rb