Pelabur’s Pizza Mini Case – Capital Structure Decision

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a) Repurchase of stock=RM15x100000shares=RM1500000
Equity after repurchase of stock=repurchase of stock-amount borrowed

|Scenario |Amount borrowed(RM) |Equity after repurchase of stock(RM) | |1 |0 |1500000-0=1500000 | |2 |187500 |1500000-187500=1312500 | |3 |375000 |1125000 | |4 |562500 |937500 | |5 |750000 |750000 | |6 |937500 |562500 | |7 |1125000 |375000 |

b) Weight of equity=(equity after repurchase of stock/repurchase of stock) x100% Weight of debt + weight of equity=100%

|Scenario |Weight of debt(%) |Weight of equity(%) | |1 |100-100=0 |1500000/1500000 x100%=100.0 | |2 |100-87.5=12.5 |1312500/1500000 x100%=87.5 | |3 |25.0 |75.0 | |4 |37.5 |62.5 | |5 |50.0 |50.0 | |6 |62.5 |37.5 | |7 |75.0 |25.0 |

c) After-tax cost of debt=pre-tax cost of debt x (1-T)
=(prime rate + risk premium)x(1-T)

|Scenario |Prime rate(%) |Risk premium(%) |Tax(%) |After-tax cost of debt(%) | |1 |5 |2.0 |40 |(5%+2%)x(1-0.4)=4.2 | |2 |5 |2.0 |40 |(5%+2%)x(1-0.4)=4.2 | |3 |5 |2.5 |40 |4.5 | |4 |5 |3.5 |40 |5.1 | |5 |5 |5.0 |40 |6.0 | |6 |5 |7.0 |40 |7.2 | |7 |5 |10.0 |40 |9.0 |

d) CAPM=Krf+(RPm)β , Krf=4% , RPm=8%

|Scenario |Subjective beta, β |CAPM(%) | |1 |2.0 |4%+8%(2.0)=20.0 | |2 |2.1 |4%+8%(2.1)=20.8 | |3 |2.3 |22.4 | |4 |2.5 |24.0 | |5 |2.9 |27.2 | |6 |3.3...
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