Garman Constructions Ltd finances its assets worth $30 million with 40% debts and 60% equity. The following information is available for the company. Cost of equity capital: RE 15% Cost of debt: RD 8% Company tax rate: Tc 30% Dividend payout ratio 100% Expected earnings before interest and tax (EBIT) $4.5 million Garman Construction considers purchasing 2000 shares at $13.50 each from Citra Buildings Ltd and plan to hold the shares for two years before selling them on the stock market. The shares are expected to be sold for $18.50 per share after three years. a) Should the company purchase the shares based on the holding-period return? (6 marks) b) Discuss Extreme Position 1 in the context of Garman Construction Ltd. Assuming that its original capital structure was an all-equity company with 3 million ordinary shares and the issue of 40% debt in the current capital structure is used to buy back ordinary shares at $10 each share.

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