Reference no: EM132943010

Question - You're the CFO of Fishing Fun Inc. The company has expected EBIT of BDT 50 million every year forever. The company currently has an all equity capital structure with 694,177 shares outstanding. Company's shares are currently trading in market for BDT 170. The company's past dividend payments are given below:

Year Dividend per share (BDT)

2019 12

2018 10

2017 9

2016 7.5

2015 6

2014 5

Fishing Fun is evaluating a project to expand business in South America (Note: Cashflows from this project will only affect the company's existing business if the project is accepted!). This project would enable the company to generate yearly revenue of BDT 5 million and incur operating cost of BDT 2 million. The project has 5 years life and would cost 10 million of investment. The additional setup cost of the project would be BDT 500,000. This project will require an initial investment in current assets worth BDT 800,000, of which BDT 300,000 will be funded by short term creditors. The investment in working capital will grow by 10% till 3rd year of the project. The project will be depreciated using 3 years MACRS and can be scraped for BDT 1 million after the useful life is over. The average tax rate is 35%. Fishing Fun is also contemplating capital restructuring. They have assessed that the borrowing rate would be 12% if they're levered. The company plans for a target debt-equity ratio of 0.67. Required:

a) Evaluate the project's feasibility using different decision rules and decide to accept/reject the project. Note: Fishing Fun wants to recovers initial investment within 2.5 years.

b) Assuming zero bankruptcy cost (MM case II), what would be the firm's Weighted Average Cost of Capital with all equity capital structure? What would be the firm's Weighted Average Cost of Capital after capital restructuring? Will you go for capital restructuring? Justify your decision.

c) Assuming zero bankruptcy cost (MM Case II), what would be the firm value with all equity capital structure? What would be the firm value after capital restructuring? Will you go for capital restructuring? Justify your decision.

d) If dividend policy remains unchanged, how much dividend the company would pay in 2020? What would be the ex-dividend price in 2020 (assuming other factors are unchanged)? How many shares company may buy back in open market transaction instead of paying cash dividend in 2020? Will you prefer paying cash dividends or will you use the cash instead for stock repurchase? Justify your decision.