The following scenario applies to Questions $2$ and $3$:

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 issuance

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 $1\mathrm{.}5\%,10-$

year US treasury bond rate is $4\%,10-$year Singapore treasury bond rate is $3\mathrm{.}5\%.$

The rate of return on the S&P $500$ is $10\%,$ rate of return on the Straits Times Index is

$9\mathrm{.}3\%.$

The following are the observed betas of SIG's closest competitors:

Question $2$

SHOW ALL WORK FOR FULL CREDIT

a$)$ Estimate SIG's unlevered beta.

$(9$ marks$)$

b$)$ Assuming that SIG 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$)$

$($TOTAL: $15$ 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:

Use the full proceeds from debt financing to repurchase a portion of its stock.

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.

$(8$ marks$)$

d$)$ Discuss which option the shareholders of SIG will likely adopt.

$(2$ marks$)$