SUBJECT : CORPORATE FINANCE

TOPIC : CAPITAL STRUCTURE

Blue Ivy Bhd is a manufacturing company that produces solar energy on small scales of production. On average, the company has annual eamings before interest and tax (EBIT) of RM3 million in perpetuity. At present, the optimal debt-to-equity ratio of Blue Ivy Bhd has remained at 0.25. The cost of issuing debt is 6% per year with the interest cost paid at RM240,000 annually. The unlevered cost of capital is 15%. Required: a. In a world with no tax, calculate the following: i. The value of a firm ii. The value of the firm's equity iii. The return on equity (5 marks) b. In a world with taxes, briefly explain each of the following: (Note: relates to your calculation and corporate tax of 24% ) i. The value of a firm ii. The return on equity iii. The company's overall cost of capital