Pelabur’s Pizza Mini Case †Capital Structure Decision

a) salvation of stock=RM15xhundred thousandshares=RM1500000 Equity after repurchase of stock=repurchase of stock- tote up 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) saddle of right=(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. 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. 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. 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)? , Krf=4% , RPm=8% Scenario Subjective beta, ? 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 30. 4 7 3. 7 33. e) WACC=WdKd+WsKs Scenario Wd(%) Ws(%) Kd(%) Ks(%) WACC(%) 1 0 100. 0 4. 2 20. 0 0(0. 042)+1(0. 2)=20. 00 2 12. 5 87. 5 4. 2 20. 8 0. 125(0. 042)+0. 875(0. 208)=18. 73 3 25. 0 75. 0 4. 5 22. 4 17. 93 4 37. 5 62. 5 5. 1 24. 16. 91 5 50. 0 50. 0 6. 0 27. 2 16. 60 6 62. 5 37. 5 7. 2 30. 4 15. 90 7 75. 0 25. 0 9. 0 33. 6 15. 15 f) Shares repurchased=amount borrowed/repurchased stock price per share Remaining shares nifty=shares outstanding (old)-shares repurchased Scenario Shares outstanding Shares repurchased Remaining shares outstanding 1 100000 RM0/RM15=0 100000-0=100000 2 100000 RM187500/RM15=12500 100000-12500=87500 3 100000 25000 75000 4 100000 37500 62500 5 100000 50000 50000 6 100000 62500 37500 7 100000 75000 25000 g) Total addition=Earning(net income)/WACC otal equ ity=total assets-total liabilities Interest expense=amount borrowed x interest rate(prime rate + risk premium) Scenario 1 1 300000/100000=3. 00 2 292125/87500=3. 34 3 3. 78 4 4. 34 5 5. 0 6 6. 20 7 7. 95 h) There are two main types of financing for a business which are debt or equity financing. Debt financing is describe as the type of financing we develop from a tralatitious bank loan and equity financing is describes as the financing we receive from opine big(p) into our business from outside investors.Therefore, the benefit of debt financing is refer to its limited in amount and we will pay down the debt over time to a zero sum balance without all further obligation to the lender and the down stroke to debt financing is to define that traditional lenders will return a gravely look at our business including how long it has been in existence, income from operation, expenses and it will require hard assets for collateral for the loan. Moreover, those lenders wil l most certainly want us to personally guarantee for the re honorariums of the loan. Another disfavor of debt financing is that our organization will be burdened with some other type of regular payment which is usually a monthly payment which depending on the terms and conditions of the financing and this can absorbs critical specie flow, especially those individual or partners with small business.Besides that, the benefit of equity financing or venture capital is that we will be also receiving money in exchange for equity in our business in the form of stock or some other form of equity like percentage of income or gross net sales. A fundamental benefit of this type of the equity financing is to define in that location is no monthly payment requirement to investors. Instead, we are giving up ownership interest, most often, permanently. Furthermore, the traditional lenders, banks for example, will look at our business much slightly different than venture capitalistic. Bankers wan t a zero-risk or near-zero risk position when they provide financing and will rely almost completely on the operating economics of the business with little regard for potence future ripening.Thus, they want to see difficult cash flow backed up by hard assets before they do a sell with the ingredients that most small business lack or they wouldnt be seeking for financing. Eventually, the venture capitalist is on the other hand which they tend to consider the management team and the potential future growth of the business more heavily than actual operating numbers, especially for those with small business with large potential but few sales and little or no operating history. Although these two types of lender is transform in their approaching to analyzing a business for funding, we can also be sure that careful trial of our business will be conducted.