Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Calculate the number of shares that can be issued irrespectively under the current and proposed capital structures.

Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Calculate the number of shares that can be issued irrespectively under the current and proposed capital structures.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 8P

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QUESTION 2 Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Based on earnings per share, advise management whether they must introduce the 30% debt or retain the totally equity financed capital structure.
Question 2 A company is all equity financed with 18,000 shares outstanding and each share sells for $22. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company? (d) What is the cost of equity in the levered company?
Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Which capital structure would you advise the company to choose if the aim is to maximise shareholder wealth? (Note that the share price must be the basis of your argument).
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