Singapore Industrial Gas (SIG) is trying to understand its cost of capital, capital structure, and the impacts of any change. You have been given the following information to work with:: Current market value of debt is $3 million with a yield-to-maturity of 8%. Current market value of equity is $6 million with 3 million shares outstanding and a required return of 11%. If SIG intends to seek debt financing, they are able to do so through a bond issusce valued at $2 million at a yield-to-maturity of 9%. If SIG intends to seek equity financing, they are able to issue $2 million worth of new shares. The 3-year US treasury bill rate is 2%, 3-year Singapore treasury bill rate is 1.5%, 10- year US treasury bond rate is 4%, 10-year Singapore treasury bond rate is 3.5%. The rate of retum on the S&P 500 is 10%, rate of retum on the Straits Times Index is 9.3% The following are the observed betas of SIG's closest competitors: Comparable Company Observed Beta Percentage of value that is debt 1.6675 2 1.3041 3 1.8378 4 1.3923 Question 2 SHOW ALL WORK FOR FULL CREDIT a) Estimate SIG's unlevered beta. 30 20 33 17 (marks) b) Assuming that S10 can only choose either the debt or equity financing, compute the firm's levered beta under each option and comment on the differences, if any. (6 marks) a) Compute SIG's original cost of capital before they proceed with the intended debt or equity financing. (6 marks) With the available financing options, SIG is considering changing its capital structure. They can either: 1. Use the full proceeds from debt financing to repurchase a portion of its stock. 2. Use the full proceeds from equity financing to repurchase a portion of its debt. b) Under each option, compute the cost of capital of SIG after the repurchase. (8 marks) c) Compute the new stock price after the change to SIG's capital structure, assuming a growth in cash flows of 2%, any share issuance or buyback happens at the current price, and that the market value of existing debt does not change with the recapitalization. d) Discuss which option the shareholders of SIG will likely adopt. (8 marks) (2 marks)