Reference no: EM132739889

a) In raising the equity for the company, Stardust Berhad has issued both the preference shares and ordinary shares. For its ordinary shares, the company has recently paid a dividend of RM0.70 per share. It is expected to grow at a constant rate of 4%, and has a required return of 11%. Recently, Stardust has been persuaded to buy a new company. Stardust estimates that if it acquires the company, its constant growth rate would increase to 6.5%. However, the company's risk profile will also increase, hence a required return of 12%.

(i) Should Stardust Berhad go ahead with the acquisition of the new company?

(ii) You are contemplating to purchase shares in Stardust Berhad. However, you are indecisive whether to buy the preferences shares or the ordinary shares. What are the things that you would consider before deciding on the type of shares that you should buy?

b) Stardust Berhad produces computer chips that wholesales for RM7. Each unit has variable operating costs of RM3.00. Fixed operating costs are RM55,000 per year. The firm pays RM12,000 interest and preferred dividends of RM6,000 per year. At this point, the firm is selling 30,000 units per year and is taxed at a rate of 40%. (Note: Give all final answers in 2 decimal places)

(i) Calculate Stardust's operating breakeven point in units.

(ii) On the basis of the firm's current sales of 30,000 units per year and its interest and preferred dividend costs, calculate its earnings before interest and tax (EBIT) and earnings available for common shareholders.

(iii) Calculate the firm's degree of operating leverage (DOL).

(iv) Calculate the firm's degree of financial leverage (DFL).

(v) Calculate the firm's degree of total leverage (DTL).

(vi) Stardust has entered into a contract to produce and sell an additional 15,000 computer chips in the coming year. Calculate the new EBIT.