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Question 3 Hijaz Electronics Sdn. Bhd. has made the following forecast for the upcoming year based on the company's current capitalization: Interest expense RM2,000,000 Operating income (EBIT) RM20,000,000 Earnings per share RM3.60 The company has RM20 million worth of debt outstanding and all of its debt yields 10 percent. The company's tax rate is 26 percent. The company's price earnings (P/E) ratio has traditionally been 12%, The company's investment bankers have suggested that the company recapitalize. Their suggestion is to issue enough new bonds at a yield of 10 percent to repurchase 1 million shares of common stock. Assume that the stock can be repurchased at today's RM40 stock price. Assume that the repurchase will have no effect on the company's operating income; however, the repurchase will increase the company's dollar interest expense. Also, assume that as a result of the increased financial risk the company's price earnings (P/E) ratio will be 11.5 after the repurchase. 7 COURSE: BAFB3013 FINANCIAL MANAGEMENT FACULTY: BUSINESS ADMINISTRATION REQUIRED: a) What is the net income before the change? b) How many shares are currently outstanding? c) What is the current stock price? d) What would be the expected year-end stock price if the company proceeded with the recapitalization? Should Hijaz proceed with the recapitalization