Calculate and explain the expected year-end stock price

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Question - Roland Resources has a new management team and plan to modify Roland's capital structure. Currently the company has RM40 million worth of debt outstanding and its debt yields 8 percent. EBIT (Earnings before Interest and Taxes) is projected to be RM220 million and the company is currently under 28 percent tax bracket. The current share price of the company is RM2.40.

The new recapitalization plan would require the company to repurchase 100 million shares and finance it using new debt which carries a yield of 8 percent. The current P/E (Price to earnings) for the company is 12x. Post restructuring the company's P/E will be 18 due to increased financial risk and the current EPS (Earnings per share) is 0.25. Given these data, calculate and explain the expected year-end stock price if the company proceeded with the recapitalization.

Reference no: EM132993971

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