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Question 2

Maju Dynamic PLC., a producer of turbine generator, is in this situation; EBIT = RM4.5 million; tax rate = 30%; debt outstanding (bond) = D = RM2.0 million; K_d = 11%; K_s = 14%; share of stock outstanding = N₀ = 800,000; and book value per share = RM10.00.Since Serba Dynamic's product market is stable and the company expects no growth, all earnings are paid out as dividends. The bond is currently trade at par value.

Required:

a. Calculate Maju Dynamic's earning per share (EPS) and its price per share (P₀)? (5 Marks)

b. Derive Maju Dynamic's weighted average cost of capital (WACC)? (6 Marks)

c. Maju Dynamic's can increaseits debt to a total of RM10.0 million, using the newdebt to buy

back and retire some of the shares at current price. Its interest rate on debt will be 13% (it will have

to calland refund the old debt), and itscosts of new equity will rise from 14% to 16%. EBIT will

remain constant. Should Serba Dynamic's change its capital structure? (8 Marks)

d. If Serba Dynamic did not have to refund the old debt of RM2.0 million, then how would this effects

the company? (6 Marks)