Question
Financial Management Merah Berhad current interest expense is RM2,000,000, operating income (EBIT) is and Earnings per share (EPS) is RM4.00. The company owes RM20,000,000 in
Financial Management
Merah Berhad current interest expense is RM2,000,000, operating income (EBIT) is and Earnings per share (EPS) is RM4.00. The company owes RM20,000,000 in debt, with a 10% interest rate.
The corporate tax rate is 28%. Historically, the company's price-to-earnings (P/E) ratio has been 10x. Investment bankers have recommended that the company be recapitalized. Their proposal is to sell enough new bonds at a 10% rate to buy back 1,400,000 shares of common stock.
Assume that the repurchase has no impact on the company's operating income, but it will increase the company's dollar interest expenditure. The company's price earnings (P/E) ratio will be also increase to 10.5x following the repurchase because of the heightened financial risk.
Required:
- What is the net income before the change?
- How many shares are currently outstanding?
- What is the current stock price?
- What would be the expected year-end stock price if the company proceeded with the recapitalization? Should Merah Berhad proceed with the recapitalization?
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The Oxford Handbook Of IPOs
Authors: Douglas Cumming, Sofia Johan
1st Edition
0190614579, 978-0190614577
