Question 2 Based on the current capitalization, Roce Sdn Bhd (RSB) has made the following forecast for the coming year: Interest expense RM1,200,000 Operating income (EBIT) RM20,000,000 Earnings per share RM2.50 The company has RM20,000,000 worth of debt outstanding and all of its debt yields 6%. The company's tax rate is 30 %. The company's price earnings (P/E) ratio has traditionally been 8x. 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 earnings (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?
Question 2 Based on the current capitalization, Roce Sdn Bhd (RSB) has made the following forecast for the coming year: Interest expense RM1,200,000 Operating income (EBIT) RM20,000,000 Earnings per share RM2.50 The company has RM20,000,000 worth of debt outstanding and all of its debt yields 6%. The company's tax rate is 30 %. The company's price earnings (P/E) ratio has traditionally been 8x. 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 earnings (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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 2
Based on the current capitalization, Roce Sdn Bhd (RSB) has made the following forecast for the
coming year:
Interest expense RM1,200,000
Operating income (EBIT) RM20,000,000
Earnings per share RM2.50
The company has RM20,000,000 worth of debt outstanding and all of its debt yields 6%. The
company's tax rate is 30 %. The company's price earnings (P/E) ratio has traditionally been 8x.
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 earnings (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?
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