Transcribed Image Text
As a financial analyst of Bain Capital LLP, you are evaluatingtwo stocks in your firm’s portfolio: HPC Corporation Ltd (HPC)Currently, HPC is valued at $12 million. It does not have any debtand its cost of equity is 14%. The Board decided to borrow $3million and use the proceeds to repurchase shares. HPC is able toborrow from its bankers at a rate of 6% per year. SimplyPost Ltd(SP) SP was selling at $6 per share when there were 800,000 sharesoutstanding and earnings was $1.8 million. Recently, it declared athree-for-two stock split where three new shares are issued to theshareholder for every 2 shares that they held. Thereafter, anAnnual General Meeting was held to declare and approve the paymentof dividends based on a payout of 80% of earnings. Assume no marketimperfections or tax effects.(a) Calculate HPC’s value and cost of equity immediately afterthe capital restructuring under the two scenarios, namely (i) nocorporate tax and (ii)corporate tax is 17%.(b) Interpret and explain your answer in part (a).(c) Determine SP’s share price after the stock split anddividend per share.(d) Describe and discuss factors that affect SP’s dividendpolicy.