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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 |
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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:
- What are Ekovest Bhds earning per share (EPS) and its price per share?
- 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?
- If Ekovest did not have to refund the old debt of RMX million, how would this effect things?
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