HELP FOR URGENT TEST!!!

Question 3

Cattlea Berhad involves making plastic flowers and is in this situation.

EBIT = RM6.0 million

Tax Rate = 24%

Debt outstanding = RM2.0 million

Kd = 8%

Ks = 12%

Share outstanding = 1,000,000

Book value per share= RM10.00.

The company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.

Required:

a) What are Cattlea's earnings per share (EPS) and its price per share (Pa)? (6 Marks)

b) What is Cattlea's weighted average cost of capital (WACC)? (4 Marks)

c) Cattlea can increase its debt by RM5.0 million, to a total of RM7.0 million, using the new debt to buyback and retire some of the shares at current price. Its interest rate on new debt will be 10% (it will have to call and refund the old debt), and its costs of new equity will rise from 12% to 14%. EBIT will remain constant. Should Cattlea change its capital structure? (10 Marks)