Question
Jetpack Ltd. has an all equity capital structure. It has total assets worth $10 million, 10,000 outstanding shares and an EBIT of $750,000. It is
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Jetpack Ltd. has an all equity capital structure. It has total assets worth $10 million, 10,000 outstanding shares and an EBIT of $750,000. It is contemplating a move to incorporate debt to the tune of 25% of its asset value and can arrange the borrowing at a 5% p.a. interest rate. Wendy, a shareholder in the company, has 700 shares.
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i) What is Wendy's current percentage return if Jetpack follows a 100% dividend pay-out policy and there are no taxes?
(5 marks)
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ii) If Wendy prefers the company to remain all equity financed, show how she could unlever her position to maintain the same percentage return as she is earning currently? PLEASE ANSWER 2 ii thoroughly
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