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Corporate Finance: **Kindly provide workings and clear answers. Question 6: Structure Company, an all-equity firm, has 40 million shares outstanding. Its shares' par value is
Corporate Finance: **Kindly provide workings and clear answers. |
Question 6: | ||||||||||
Structure Company, an all-equity firm, has 40 million shares outstanding. | ||||||||||
Its shares' par value is RM1 each. | ||||||||||
Structure's shares are currently trading at RM5. | ||||||||||
Structure issued a press statement saying that it plans to borrow RM40 million and use the proceeds to repurchase its shares. | ||||||||||
Answer the following questions: | ||||||||||
(i) Show Structure's current equity and debts components, both in term of RM amounts and percentages. | ||||||||||
(ii) Show Structure's equity and debts components, both in terms of RM amounts and percentages, after it borrows to repurchase its shares. | ||||||||||
(iii) Suppose Structure pays corporate taxes of 30% and that shareholders expect the change in debts to be permanent. | ||||||||||
Assuming that capital markets are perfect except for the existence of corporate taxes, what would be the share price after this announcement? | ||||||||||
(iv) Suppose capital markets are perfect except for the existence of corporate taxes and financial costs. | ||||||||||
If the share price now moves to RM5.10 per share following the announcement, then what would be the present value of Structure's financial distress costs? |
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