Question $1$

Haha Sdn$.$ Bhd$.($HSB$)$ is an all$-$equity firm with $10$ million shares outstanding. It expects pre$-$

recapitalization earnings after tax of RM$13\mathrm{.}16$ million this fiscal year. The shares of the

company are now being traded at a price of RM$20.$ Currently, the firm is planning a

recapitalization strategy by issuing a debt at the value of RM$10\mathrm{.}0$ million and will be used to

repurchase common shares. After the recapitalization, the company's interest expense will be

RM$2\mathrm{.}5$ million. With the assumption that the stock price remains unchanged and the company's

tax rate is to be $40\%,$ what would be the firm's earnings per share if it were to proceed with the

recapitalization? Should the firm proceed with its plan?

Question $2$

Based on the current capitalization, Roce Sdn Bhd $($RSB$)$ has made the following forecast for the

coming year:

The company has RM$20,000,000$ worth of debt outstanding and all of its debt yields $6\%.$ The

company's tax rate is $30\%.$ The company's price earnings $(\frac{P}{E})$ ratio has traditionally been $8$ x $.$

The company's investment bankers have suggested that the company recapitalize. Their

suggestion is to have an additional amount of debt by issuing enough new bonds at a yield of $6\%$

to repurchase $1,400,000$ shares of common stock.

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 eamings $(\frac{P}{E}$ ratio will be $8x$ after the

repurchase.

What would be the expected year$-$end stock price if the company proceeded with the

recapitalization? Should RSB proceed with the recapitalization?