000001 Sison QUESTION 2 Part A Nur Company has collected the following data with respect to its capital structure, expected carnings per share, and required return Capital structure debt Expected earnings per Required return (k) ratio share (RM/share) 0 % 3.12 13 10% 3.90 15 20% 4 80 16 30% 5.44 17 40% 551 1 9 50% 5.00 20 60% 4,40 22 Required: a. Determine the optimal capital structure based on (1) maximization of expected earnings per share and (2) maximization of share value. (6 marks) b. Which capital structure do you recommend? Why? (4 marks) Part B The following financial data on the Gigih Company are available: Earnings available for ordinary shareholders RM 700,000 Number of ordinary shares outstanding 350,000 Earnings per share RM2 Market price per share RM20 Price/earnings (P/E) ratio The firm is currently contemplating using RM350,000 of its earnings to pay cash dividends of RM1 per share or repurchase stock at RM21 per share. The firm is also planning to introduce dividend reinvestment plans to its shareholders. Required: (a) Calculate the EPS after the repurchase at RM21-per-share price, using the funds that would have gone to pay the cash dividend. Explain your calculations. (6 marks) (b) If the share still sells at 10 times earnings, what will the market price be after the (2 marks) repurchase? (c) Compare the shareholders' positions under the dividend and repurchase alternative. (3 marks) (d) Explain the benefits of a dividend reinvestment plan to the shareholders and the firm? (4 marks) (25 marks) 000001 Sison QUESTION 2 Part A Nur Company has collected the following data with respect to its capital structure, expected carnings per share, and required return Capital structure debt Expected earnings per Required return (k) ratio share (RM/share) 0 % 3.12 13 10% 3.90 15 20% 4 80 16 30% 5.44 17 40% 551 1 9 50% 5.00 20 60% 4,40 22 Required: a. Determine the optimal capital structure based on (1) maximization of expected earnings per share and (2) maximization of share value. (6 marks) b. Which capital structure do you recommend? Why? (4 marks) Part B The following financial data on the Gigih Company are available: Earnings available for ordinary shareholders RM 700,000 Number of ordinary shares outstanding 350,000 Earnings per share RM2 Market price per share RM20 Price/earnings (P/E) ratio The firm is currently contemplating using RM350,000 of its earnings to pay cash dividends of RM1 per share or repurchase stock at RM21 per share. The firm is also planning to introduce dividend reinvestment plans to its shareholders. Required: (a) Calculate the EPS after the repurchase at RM21-per-share price, using the funds that would have gone to pay the cash dividend. Explain your calculations. (6 marks) (b) If the share still sells at 10 times earnings, what will the market price be after the (2 marks) repurchase? (c) Compare the shareholders' positions under the dividend and repurchase alternative. (3 marks) (d) Explain the benefits of a dividend reinvestment plan to the shareholders and the firm? (4 marks) (25 marks)
