Felix Berhad (FB) has assets worth RM 15 million which is financed by 70% equity and 30% debt. The net income is RM4.7 million. FB has set a 30% dividend payout to its shareholders. Net income and dividend are expected to remain constant or no growth (g=0%). FB has 550,000 outstanding stocks. Current cost of equity is 14% while before tax cost of debt is 12%. FB is considering to recapitalize by issuing a bond worth RM3 million at a cost of 13% before tax. FB will use this bond's proceed to repurchase some of its stocks from the market. FB's corporate tax rate is 28%. FB also forecasts that the cost of equity will rise to 17% should the proposed recapitazation is accepted. ( Note: NI=(EBIT-I)(1-T)) where NI is net income, EBIT is earnings before taxes and interest, I is interest and T is taxes.

(a) What is the firm's new capital structure and total assets value should the proposed recapitalization is accepted?

(b) Calculate the current stock price of FB AND current WACC before recapitalization?
(c) Assume that FB will maintain the dividend payout ratio at 30%, what is expected stock price should the proposed recapitalization is accepted?

(d) Assume that you are the existing shareholders of FB, should you remain or not remain as the shareholder of FB if the proposed recapitalization is accepted by the management? Why?

Answer rating: 100% (QA)

a To determine the new capital structure and total assets value after the proposed recapitalization we need to first calculate the new debt and equity ... View the full answer