Emmar construction is a Muscat based constructioncompanyplanning to raise funds for an expansion of existing business activities in other regions of middle east and in preparation for this the company has decided to calculate its weighted average cost of capital (WACC). Emmar company has the following capital structure:

RO.Million

Equity

Ordinary shares 200

Reserves 650

850

Non-current liabilities Loan notes 200

1,050

The ordinary shares of Emmar company have a nominal value of 500 Baisa per share and are currently trading on the stock market on an ex dividend basis at RO. 585 per share. Emmar company has an equity beta of 115.

The loan notes have a nominal value of RO. 100 and are currently trading on the stock market on an ex interest basis at RO. 10350 per loan note. The interest on the loan notes is 6% per year before tax and they will be redeemed in six years time at a 6% premium to their nominal value.

The risk-free rate of return is 4% per year and the equity risk premium is 6% per year. Emmar company pays corporation tax at an annual rate of 25% per year.

Required:

a) Imagine Emmarcompanys finance director has proposed in their recent board meeting to raise RO. 700 million by issuing loan notes. You are required to discuss about Emmarcompanys current capital structure, also how it will change and affect the company capital structure and risk profile, if the Board accepted the Finance directors proposal