Question: astroemeria berhad has a capital structure consisting of 30 debt...
Astroemeria Berhad has a capital structure consisting
of 30% debt and 70% equity. Astroemeria Berhad debt currently has
an 8% yield to maturity. The risk-free rate (krf) is 5%, and the
market risk premium (km-krf) is 6%. Using the CAPM, Alstroemeria
Berhad estimates that the cost of equity is currently 12%. The
company has a 28% tax rate.
i. Calculate Alstroemeria Berhad current Weighted Average Cost of Capital (WACC). (3 Marks)
ii. What is the current beta (ß) on Astroemeria Berhad common stock? (2 Marks)
iii. Alstroemeria Berhad is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity of the company's bond would rise to 9.5%; and the beta would also change to 1.6. Should the company proceed with the restructure? What would you advise Astroemeria Berhad? (4 Marks)