Question
You're the CFO of Fishing Fun Inc. The company has expected EBIT of BDT 50 million every year forever. The company currently has an all
You're the CFO of Fishing Fun Inc. The company has expected EBIT of BDT 50 million every year
forever. The company currently has an all equity capital structure with 694,177 shares outstanding.
Company's shares are currently trading in market for BDT 170. The company's past dividend
payments are given below:
Year Dividend per
share (BDT)
2019 12
2018 10
2017 9
2016 7.5
2015 6
2014 5
Fishing Fun is evaluating a project to expand it's business in South America. This project would
enable the company to generate yearly revenue of BDT 5 million and incur operating cost of BDT 2
million. The project has 5 years life and would cost 10 million to purchase. The additional setup cost
of the project would be BDT 100,000. This project will require an initial investment in current assets
worth BDT 300,000, of which BDT 150,000 will be raised from current liability. The investment in
working capital will grow by 10% till 3rd year of the project. The project will be depreciated using 3
years MACRS and can be scraped for BDT 1 million after the useful life is over. The average tax rate is
35%.
Fishing Fun is also contemplating capital restructuring. They have assessed that the borrowing rate
would be 12% if they're levered. The company plans for a target debt-equity ratio of 0.67.
Ques: Assuming zero bankruptcy cost (MM case II), what would be the firm's Weighted Average
Cost of Capital with all equity capital structure? What would be the firm's Weighted Average
Cost of Capital after capital restructuring? Will you go for capital restructuring? Justify your
decision.
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