Pelabur’s Pizza Mini Case †Capital Structure Decision

a) Repurchase of striving=RM15x lakh portions=RM1500000 Equity after repurchase of stock=repurchase of stock- add together 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) incubus of comeliness=(equity after repurchase of stock/repurchase of stock) x100% Weight of debt + tip 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 yard + 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+(rev)? , 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) Sh atomic number 18s repurchased=amount borrowed/repurchased stock price per shargon Remaining shares outstanding=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 asset=Earning(n et income)/WACC otal equity=total assets-total liabilities Interest disbursal=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) in that respect are two main types of support for a stage business which are debt or equity finance. Debt financing is describe as the type of financing we receive from a traditional bank loan and equity financing is describes as the financing we receive from venture jacket into our business from outside(a) investors.Therefore, the benefit of debt financing is refer to its limited in amount and we leave pay tidy sum the debt over time to a nought sum balance without any further obligation to the loaner and the down stroke to debt financing is to define that traditional lenders will take a hard pick up 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 will most certainly need us to personally guarantee for the repayments of the loan. Another disadvantage of debt financing is that our agreement will be burdened with close to other type of weak payment which is usually a monthly payment which depending on the cost and conditions of the financing and this can absorbs critical cash flow, especially those individual or partners with small business.Besides that, the benefit of equity financing or venture capital is that we will be as well as 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 consummate(a) net sales. A fundamental benefit of this type of the equity financing is to define there 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 sli ghtly different than venture capitalist. Bankers indispensableness a zero-risk or near-zero risk position when they provide financing and will rely almost completely on the direct economics of the business with little regard for likely future growth.Thus, they want to see slopped cash flow backed up by hard assets ahead they do a deal 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 a couple of(prenominal) sales and little or no operating history. Although these two types of lender is vary in their approaching to analyzing a business for funding, we can also be sure that careful examination of our business will be conducted.