Question

1. Grab Singapore is comparing two different capital structures: an unlevered firm (Plan A) and a levered firm (Plan B). Under Plan A, the company would have total 9 million USD worth assets. On the other hand, under Plan B, Grab wants to include debt their capital structure. There would be $3 million in debt outstanding. The interest rate on the debt is 15 percent. Currently Grab SG’s shares are trading @ $30/share in the Singapore stock exchange. Assume there’s no tax in either plan.

Required:

1. What is the break-even EBIT (EBIT/EPS Indifference point)?
2. Grab is expecting its EBIT to be roughly $180,000. Based on the break-even EBIT, should they go for plan B (incorporating debt)
3. If EBIT were $150,000, what would be the EPS and ROE under Plan A and Plan B?
4. If EBIT were $200,000, what would be the EPS and ROE under Plan A and Plan B?

Answer 1

	Assuming no Taxation.
	Interest Rate on Debt is 15%
	Current SG share Price =$30
	Comparison of Capital Structure
	Particulars	Plan A (unlevered)	Plan B
	Equity Share Capital	9,000,000	6,000,000
	Market price per share	$                              30.00	$                               30.00
a	No of Common shares outstanding	300,000	200,000
	Debt	-	3,000,000
	Interest Cost @15%		450,000
	Assume the Break even/Indifferent EBIT is x
	EBIT	x	x
	Less Interest	-	450,000
	EBT	x	(x-450,000)
	Tax	-	-
b	PAT	x	(x-450,000)
	EPS =b/a=	x/300,000	(x-450,000)/200000
	St BEP , x/300,000=(x-450,000)/200,000
	200,000*x=300,000*x-135*10^9
	100,000*x=135*10^9
	x=1,350,000
	So Break Even/Indifferent EBIT =$1,350,000	Ans a.

Ans b
If expected EBIT is $180,000, the company should not go for Plan B
as there will not be sufficient income to cover debt interest and EPS will
be negative

	Ans c.	Plan A (unlevered)	Plan B
	Equity Share Capital	9,000,000	6,000,000
	Market price per share	$                              30.00	$                               30.00
a	No of Common shares outstanding	300,000	200,000
	Debt	-	3,000,000
	Interest Cost @15%		450,000
	Given EBIT	150,000	150,000
	Less Interest	-	450,000
	EBT	150,000	(300,000)
	Tax	-	-
b	Net Income /(Loss)	150,000	(300,000)
c	EPS=b/a=	$                                0.50	$                               (1.50)
	Ans d.
		Plan A (unlevered)	Plan B
	Equity Share Capital	9,000,000	6,000,000
	Market price per share	$                              30.00	$                               30.00
a	No of Common shares outstanding	300,000	200,000
	Debt	-	3,000,000
	Interest Cost @15%		450,000
	Given EBIT	200,000	200,000
	Less Interest	-	450,000
	EBT	200,000	(250,000)
	Tax	-	-
b	Net Income /(Loss)	200,000	(250,000)
c	EPS=b/a=	$                                0.67	$                               (1.25)