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.