Question 2 Temah Berhad currently has RM100,000 debt outstanding carrying a coupon rate of 6%....
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Question 2 Temah Berhad currently has RM100,000 debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are RM200,000, and it is a zero-growth company. The company's cost of equity is 8%, and its tax rate is 24%. The company has 10,000 shares of common stock outstanding. The dividend payout ratio is 100%. Temah Berhad. is considering recalling the 6% debt by issuing RM300,000 new 7% debt. The new funds would be used to replace the old debt and to repurchase stock at the existing price. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on equity to increase to 9%. Required: a. What is the net income before the change? (3 Marks) b. What is the current stock price? (3 Marks) c. What would be the expected year-end stock price if the company proceeded with the recapitalization? Should Temah proceed with the recapitalization? (6 Marks) (Total: 12 Marks)
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