ABC company is thinking to change the capital structure of the firm. The Company has a total
Question:
ABC company is thinking to change the capital structure of the firm. The Company has a total asset of OMR 40,000,000, and OMR 8,500,000 of EBIT and is taxed at a rate of 40%.
If the book value per share is OMR 20 Complete the following table (1.5 marks)
Debt % | Total asset | Debt (OMR) | Equity (OMR) | NO. of shares |
0% | $40,000,000 | |||
10% | $40,000,000 | |||
20% | $40,000,000 | |||
30% | $40,000,000 | |||
40% | $40,000,000 | |||
50% | $40,000,000 | |||
60% | $40,000,000 |
For each level of debenture, find the total debt and interest amount. (1.5 marks)
Debt % | Total debt (OMR) | Interest rate % | Interest (OMR) |
0% | 0.0% | ||
10% | 7% | ||
20% | 8% | ||
30% | 9.5% | ||
40% | 11% | ||
50% | 13.5% | ||
60% | 16% |
Based on your answer in parts a and b and the information given in the question, Find earnings per share (EPS) at each level of the debenture. (1.5 marks)
Debt % | EBIT (OMR) | Interest (OMR) | EBT (OMR) | Tax (OMR) | Net income (OMR) | No. of shares | EPS(OMR) |
0% | |||||||
10% | |||||||
20% | |||||||
30% | |||||||
40% | |||||||
50% | |||||||
60% |
Based on your answer in part c and given estimates of required return (Ke) in the table below. Find the value per share at various levels of the debenture. (1.5 marks)
Debt % | EPS(OMR) | Ke % | P0 (OMR) |
0% | 10.0 % | ||
10% | 10.3 % | ||
20% | 10.9 % | ||
30% | 11.4 % | ||
40% | 12.6 % | ||
50% | 14.8 % | ||
60% | 17.5 % |