What should conclude about the current structure

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A portfolio manager in a Family Office that oversees a UK investment portfolio with total assets of £25 billion is analysing company RandoK Ltd., which has the following information:

EBIT= £680,000

Before Tax Interest rate = 8%

Expected market return = 9%

Total debt = £1 million

Tax rate= 40%

β of RandoK = 1.5

Total equity = £3 million

Risk free rate (Rf) = 6%

Question 1) What should he conclude about the current structure of capital of this company? Is this company creating value?

Question 2) The CFO suggests buying back shares (at their book value) and thus reducing the equity capital to £2 million (again book value). They will use cash for the buyback and everything else ceteris paribus. Is this a good suggestion? Critically evaluate this answer

Reference no: EM132564247

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