Mwinenkoma & Mwinlanaa Electronics Plc (MMEP) has its Chief Financial Officer is having MMEP recapitalization plan. The officer wants to change the capital structure of the firm, MMEP, to have a major component of its capital structure as financial leverage from the all-equity financing structure. The price per share for BRC stands at ¢60 with an outstanding common shares of 500,000. The firm’s expected EBIT per year stands at ¢2,400,000 in perpetuity. On the recapitalization the firm has in its proposal that long-term debt will be issued at a value of ¢15,000,000 at an interest rate of 6.0%. Common stock numbering 250,000 shares will be repurchased with the proceeds valued at ¢15,000,000. Assuming market frictions like personal income tax or corporate income tax do not exist, estimate the equity expected return MMEP shareholders under the two capital structure positions, namely: the current all-equity and the recapitalization plan. 

 

Assuming that last year MMEP Inc., issued out an IPO, to have its first common shares outstanding of 2 million with ¢0.25 as par value to prospective investors at a per share price of ¢15. MMEP earned ¢0.07 per share as net income in its first year of operations and declared ¢0.005 dividend per share. By the end of the year, the per share stock price of the company stood at ¢20. When the business operations end after one year, how can you prepare the equity account for MMEP Inc., and what is the market capitalization for the firm.

Answer rating: 100% (QA)

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