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QUESTION 4 Time Allocated: 30 minutes J imbara Network Berhad has made the following forecast for the upcoming year based on the company's current capital structure: Interest expense: RM 2,000,000 EBIT: RM20,000,000 EPS: RM3.60 The company has RMZO million worth of debt outstanding and all of its debt yields 10%. The company's tax rate is 25%. The company's price earnings (P/E) ratio has traditionally been 12 times. The company's investment bankers have suggested that the company recapitalize. Their suggestion is to issue enough new bonds at a yield of 10% to repurchase 1 million shares of common stock. J imbara Network expects that the stock can be repurchased at today's stock price of RM40. Assume that the repurchase will have no effect on the company's EBIT. However, the repurchase will increase J imbara Network's Ringgit interest expense. Also, assume that as a result of the increased nancial risk the company's price earnings (P/E) ratio will be 11.5 times after the repurchase. Calculate the expected year-end common share price if J imbara Network proceeded with the recapitalization. [Total: 15 marks] Leverage & Capital Structure EBIT = PQ-VQ - FC QRE = FC/ (P - VC) DOL = % A in EBIT; DOL = S - V = Gross Profit % A in Sales S - V - F EBIT DFL = % A in EPS ; DFL = EBIT % A in EBIT EBIT- C Where C = annual interest expense and/ or preferred dividends adjusted on a before-tax basis DTL = DOL x DFL DTL = % A in EPS DCL = Gross Profit % A in Sales EBIT - C (EBIT - Interest equity) (1 - t) = (EBIT - Interest debt) (1 -t) N equity N debt Net Income (NI) = (EBIT - Interest) (1 - tax rate) EPS = (EBIT - Interest)(1 - tax rate) - Pref. dividend Shares outstanding Debt ratio = Total Debt / Total Asset Debt-Equity ratio = Total Debt / Stockholders Equity g = (Retention rate) (ROE) = (1 - Payout rate) (ROE) Return on common equity (ROE) = EATCS / Common Equity Return on total assets (ROA) = EATCS / Total Assets k = k + B, ( k. - k.) Po = DPS Po = DPS, (1 +g)_DPS, ks -g k , - g P/E = Market price per share Earnings per share