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The following information applies to Ekovest Bhd: Operating Income (EBIT) RM6,000,000 Cost of debt 9% Debt RM4,000,000 Cost of equity 14% Shares outstanding 2,500,000 Tax

The following information applies to Ekovest Bhd:

Operating Income (EBIT)

RM6,000,000

Cost of debt

9%

Debt

RM4,000,000

Cost of equity

14%

Shares outstanding

2,500,000

Tax rate

30%

Book value per share

RM8.00

All earnings generated are paid out as dividends since the product market for its product is

stable and expects no growth. The debt consists of perpetual bonds. Required:

  1. What are Ekovest Bhds earning per share (EPS) and its price per share?
  2. Ekovest can increase its debt by RM7 million, to a total of RM11 million, using the new debt to buy back and retire some of the shares at current price. Its interest rate on debt will be 11% (it will have to call and refund the old debt), and its cost of new equity will rise from 14% to 16%. Operating income will remain constant. Should Ekovest change its capital structure?
  3. If Ekovest did not have to refund the old debt of RMX million, how would this effect things?

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