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Osama Co. is a listed company operating in the textile industry. Osama Co's board of directors met recently to discuss a new strategy for the business. The proposal put forward was to sell all the old plant and machinery and use this fund as well as borrow from market to purchase new plant and equipment. The new plant and machinery are more productive and meet the current standard quality required by the international buyers. It is also argued that new plant is more energy efficient and environment friendly that gives more advantage when facing international competitors.
New Plant price Rs.5.32 million
Sales of old plant Rs.1.32 million
Firm existing capital structure i.e. debt to assets ratio is 40:60.
At this level firm interest rate on all debt is 9.5%.
Instructions:
Question 1. How much borrowing required by firm?
Question 2. Why risk factor will increase if firm is changing its capital structure?
Question 3. What is the current weighted average cost of capital?
Question 4. What the new cost of equity capital?
Question 5. What would be new Weighted Average Cost of Capital?
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