Reference no: EM132739465

Fine and Nice Berhad (F&B) is currently all equity financed. It has 10,000 shares of equity outstanding, selling at Rm100 a share. F& B is considering a capital restructuring. The low-dept plan calls for a dept issue of Rm200,000 with the proceeds used to buy back share. The high-dept plan would exchange Rm400,000 of dept for equity. The dept will pay an interest rate of 10%. F&B is expected to generate earnings before interest and tax (EBIT) Rm110,000 after the restructuring. The firm pays no taxes.

From the above information, you are required to:

Problem 1) determine the:

a) earnings per share without dept (current situation)
b) dept to equity ratio if F&B borrows Rm200,000.
c) earnings per share (EPS) of F&B if it borrows Rm200,000.
d) dept to equity ratio if F&B borrows Rm400,000.
e) EPS of F&B if it borrows Rm400,000.

Problem 2) Explain the effect of dept usage on shareholders' returns based on your previous answer.