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QUESTION TWO Kamirithu Ltd plans to announce that it will issue Sh..200 million of perpetual debt and use the proceeds to repurchase common stock. The
QUESTION TWO Kamirithu Ltd plans to announce that it will issue Sh..200 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a 9 percent annual coupon rate. Kamirithu is currently an all equity firm worth Sh. 1000 million with 50 million shares of common stock outstanding. After the sale o the bonds, Kamirithu will maintain the new capital structure uadefinitely. Kamirithu currently generates pretax earnings of Sh-150 million. This level of earnings is expected to remain constant in perpetuity Kamirthuis subject to corporate tax rate of 40%. Required: (a) What is the expected return on Kamirithu's equity before the announcement of the debt issue? Page 2 of 4
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