The capital structure for Jebat Sdn Bhd is provided here: Capital structure RM’000 Bond 8,000 Preferred stock 5,000 Common stock 7,000 The firm is in a 30% tax bracket and plans to maintain the above capital structure in the future. The firms have a bond with RM1,000 par value, coupon interest rate of 12% and the floatation cost of 4% of the RM1,350 market price. The bond matures in 10 years. The preferred stock paying a RM10 dividend. If a new issue is offered, floatation cost will be 14% of the current price of RM195. The common stock price is RM32.80. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for last year was RM2.80. If new stock is issue, RM12 will be charged as floatation cost. a. Assuming Jebat Sdn Bhd is trying to decide whether to revise its target capital structure. Currently it targets 60-40 mix of debt and equity but it is considering a target capital structure with 70% of debt. With the assumption that the cost of debt and equity remained unchanged (excluding preference stock), do you think shareholders are affected by the increase in debt to 70%? Explain your answer.
The capital structure for Jebat Sdn Bhd is provided here: Capital structure RM’000 Bond 8,000 Preferred stock 5,000 Common stock 7,000 The firm is in a 30% tax bracket and plans to maintain the above capital structure in the future. The firms have a bond with RM1,000 par value, coupon interest rate of 12% and the floatation cost of 4% of the RM1,350 market price. The bond matures in 10 years. The preferred stock paying a RM10 dividend. If a new issue is offered, floatation cost will be 14% of the current price of RM195. The common stock price is RM32.80. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for last year was RM2.80. If new stock is issue, RM12 will be charged as floatation cost. a. Assuming Jebat Sdn Bhd is trying to decide whether to revise its target capital structure. Currently it targets 60-40 mix of debt and equity but it is considering a target capital structure with 70% of debt. With the assumption that the cost of debt and equity remained unchanged (excluding preference stock), do you think shareholders are affected by the increase in debt to 70%? Explain your answer.
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
Related questions
Question
.The capital structure for Jebat Sdn Bhd is provided here:
Capital structure RM’000
Bond 8,000
Preferred stock 5,000
Common stock 7,000
The firm is in a 30% tax bracket and plans to maintain the above capital structure in the future.
The firms have a bond with RM1,000 par value, coupon interest rate of 12% and the floatation
cost of 4% of the RM1,350 market price. The bond matures in 10 years.
The preferred stock paying a RM10 dividend. If a new issue is offered, floatation cost will be
14% of the current price of RM195.
The common stock price is RM32.80. The company’s executive anticipates a dividend constant
growth rate of 7% and dividend for last year was RM2.80. If new stock is issue, RM12 will be
charged as floatation cost.
a. Assuming Jebat Sdn Bhd is trying to decide whether to revise its target capital structure.
Currently it targets 60-40 mix of debt and equity but it is considering a target capital
structure with 70% of debt. With the assumption that the cost of debt and equity remained
unchanged (excluding preference stock), do you think shareholders are affected by the
increase in debt to 70%? Explain your answer.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education