Question 2

Oren Manis Berhad has a capital structure that consists of RM2 million of debt, and RM11 million of common equity, based upon current market values from its 2,000,000 shares. The companys yield to maturity on its bonds is 7%, and investors require a 14% return on common stock.

1. If the marginal tax rate is 28%, what is the company's WACC?

(2 Marks)

2. If Oren Manis Berhad were to generate an EBIT of RM15,000,000 this year, calculate the company earning per share (EPS) and its price per share (P₀).

(3 Marks)

3. Oren Manis Berhad can increase its debt by RM8.0 million and using the new debt to buy back the shares at current price. Its interest rate on the new debt will be the same as its earlier debt and its costs of new equity will rise from 14% to 17%. EBIT will remain constant. Should Oren Manis Berhad change its capital structure?

(5 Marks)