Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 2 Pipeep Berhad is a manufacturer producing electrical appliances. Currently the company has no growth opportunities (g = 0), and it pays out all
Question 2 Pipeep Berhad is a manufacturer producing electrical appliances. Currently the company has no growth opportunities (g = 0), and it pays out all of its earnings as dividends (EPS = DPS). Pipeep's stock price can be calculated by simply dividing earnings per share by the required return on equity capital, which currently equals the WACC because the company has no debt. The company financial information are as follows: Total assets RM100 million Operating income (EBIT) RM20 million WACC 10% Tax rate 30% No of shares outstanding 2 million A new appointed CFO beliefs that the company would be much better off if it were to change its capital structure to 30% debt and 70% equity. After meeting with investment bankers, the CFO concludes that the company could issue RM30 million of debt at a before-tax cost of 5%. The RM30 million raised from the debt issue would be used to repurchase stock at the current price. The repurchase will have no effect on the firm's EBIT; however, after the repurchase, the cost of equity will increase to 11%. Required: a) Calculate the stock price before the recapitalization. (4 Marks) b) What will be its estimated stock price after the capital structure change if Pipeep Berhad follows the CFO's advice? (5 Marks) c) Should Pipeep Berhad follows the CFO advice? (1 Marks) (Total: 10 Marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started