Canterbury Berhad (CTB) Has Assets Worth RM 10 Million Which is Financed

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Canterbury Berhad

Canterbury Berhad (CTB) has assets worth RM 10 million which is financed by 70% equity and 30% debt. The net income is RM4.5 million. CTB has set a 30% dividend payout to its shareholders. Net income and dividend are expected to remain constant or no growth (g=0%). CTB has 500,000 outstanding stocks. Current cost of equity is 14% while before tax cost of debt is 12%. CTB is considering to recapitalize by issuing a bond worth RM2 million at a cost of 13% before tax. CTB will use this bond’s proceed to repurchase some of its stocks from the market. CTB CTB’s corporate tax rate is 28%. CTB also forecasts that the cost of equity will rise to 17% should the proposed recapitazation is accepted. ( Note: NI=(EBIT-I)(1-T)) where NI is net income, EBIT is earnings before taxes and interest, I is interest and T is taxes.

(a) What is the firm’s new capital structure and total assets value should the proposed recapitalization is accepted? (3 marks)

(b) Calculate the current stock price of CTB AND current WACC before recapitalization? (10 marks)

(c) Assume that CTB will maintain the dividend payout ratio at 30%, what is expected stock price should the proposed recapitalization is accepted? (14 marks)

(d) Assume that you are the existing shareholders of CTB, should you remain or not remain as the shareholder of CTB if the proposed recapitalization is accepted by the management? Why? (3 marks)

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