Subject: BAFB3013 FINANCIAL MANAGEMENT

Problem Set: Capital Structure

Question 1

Promto KPK Inc.'s target capital structure is 20 percent debt, 5 percent preferred stock, and 75 percent common stock. Assume that the firm's after-tax yield to maturity on its bond is 6 percent, and that the investors require a 7.5 percent return on Promto preferred stock and a 15 percent return on its common stock. What is Promto KPK's WACC?

Question 2

AJCroft Sdn. Bhd. currently has RM200,000 debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are RM100,000, and it is a zero-growth company. The company's cost of equity is 10 percent, and its tax rate is 27%. The company has 10,000 shares of common stock outstanding. The dividend payout ratio is 100%.

AJCroft Sdn. Bhd. is considering recalling the 6 percent debt by issuing RM400,000 new 7 percent debt. The new funds would be used to replace the old debt and to repurchase stock at the existing price. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on equity to increase to 11 percent. If this plan is carried out, what would be the company's new stock price?