Question: Based on the current capitalization, KHM Sdn Bhd has made the following forecast for the coming year: Interest expense RM2,000,000 Operating income(EBIT) RM40,000,000 Earnings per

Based on the current capitalization, KHM Sdn Bhd has made the following forecast for the coming year:

Interest expense RM2,000,000

Operating income(EBIT) RM40,000,000

Earnings per share RM4.00

The company has RM20,000,000 worth of debt outstanding and all of its debt yields 10 %. The companystax rate is 30%. The companys price earnings (P/E) ratio has traditionally been 10. The companys investment bankers have suggested that the company recapitalize. Their suggestion is to issue enough new bonds at a yield of 10% to repurchase 1,400,000 shares of common stock.

Assume that the repurchase will have no effect on the companys operating income; however, the repurchase will increase the companys dollar interest expense. Also, assume that as a result of the increased financial risk, the companys price earnings (P/E) ratio will be 10.5x after the repurchase.

What would be the expectedyear-end stock price if the company proceededwith the recapitalization? Should KHM proceedwith the recapitalization?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

Based on the current capitalization, KHM Sdn Bhd has made the following forecast for the coming year: Interest expense RM2,000,000 Operating income (EBIT) RM40,000,000 Earnings per share RM4.00 The...

Question below: What does Ferrari gain from the IPO process? 1.581 V8 686 Exhibit 1 FERRARI: THE 2015 INITIAL PUBLIC OFFERING Ferrari Car Shipments Full Year First Half of Year 2012 2013 2014 2014...

Your company has made the following forecast for the upcoming year based on the company's current capitalization Interest expense $4,000,000 Operating income (EBIT) $38,000,000 Earnings per share $...

Your company has made the following forecast for the upcoming year based on the company's current capitalization: Interest expense $4,000,000 Operating income (EBIT) $36,000,000 Earnings per share $...

Your company has made the following forecast for the upcoming year based on the company's current capitalization: Interest expense $ 4,000,000 Operating income (EBIT) $36,000,000 Earnings per share $...

I did the ratios except for the price earnings ratio and the comprehensive income, so can you help me on those and in the requirements 1A and 1B? this is a project for school $ 80 BOROUGH OF...

1. Prepare a written analysis of the financial ratios of the company Walmart.. This must include trend analysis (historical and projected) and comparative analysis (cross-sectional or industry). The...

Please answer this question.. Very easy. -What sources of value most plausibly account for the differences between buyer and seller? -Structure and execute a discounted cash flow valuation of all of...

For the purposes of this question, you should make the following assumptions (except where noted in the questions below): all tables provided D = 0.2 (both for Media General and the media companies...

Please show the work in Excel Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Starbucks. Do the analysis on the basis of the...

If climate change were to reduce the output per acre of wheat but not the output of other crops, what effect this would have on the soybean market? A) The demand for soybeans would shift right and...

Referring to Exercise 3.38, find (a) The marginal distribution of X; (b) The marginal distribution of Y.

Discussion (Change in Accounting Method) Harley Davis Inc. started its unicycle manufacturing business in 2023 and acquired $600,000 of equipment at the beginning of 2023. It decided to use the...

a=2 b= 0 c= 2 d=0 e=0 f=9 g=3 5. Draw the Network diagram for the following project. Estimate the Earliest start time and Latest finish time for each activity. If every day it cost 200 rials for this...