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FM – L2 – Q37 – Capital structure

Calculate the total value of a geared company and its equity value using Modigliani and Miller's theory after issuing debt to repurchase shares.

Question

A company has 4,000,000 equity shares in issue. The shares have a current market value of GH¢10 each. The company is considering whether to issue GH¢15,000,000 of debt finance and use the cash to buy back and cancel some equity shares. The tax rate is 30%.

According to Modigliani and Miller, if the company decided to issue the debt capital and repurchase shares, what would be:

(a) the total value of the geared company, and (3 marks)

(b) the value of equity in the company? (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital structure, Company valuation, Debt Finance, Equity valuation, Gearing, Modigliani and Miller
Level: Level 2

Topic: Capital structure

FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

Question

When determining the financial objectives of a company, it is necessary to take three types of policy decision into account: investment policy, financing policy, and dividend policy.

Required:

Discuss the nature of these THREE types of decisions, commenting on how they are inter-related and how they might affect the value of the firm (that is the present value of projected cash flows).

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flows, Cost of Capital, Debt Finance, Dividend Policy, Equity Finance, Financial Decisions, Financing Policy, Investment Policy, Project Viability, Shareholder Value
Level: Level 2

Topic: Introduction to Investment Appraisal

Tag (SQ): Debt Finance

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FM – L2 – Q37 – Capital structure

Calculate the total value of a geared company and its equity value using Modigliani and Miller's theory after issuing debt to repurchase shares.

FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

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Tag (SQ): Debt Finance

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FM – L2 – Q37 – Capital structure

Calculate the total value of a geared company and its equity value using Modigliani and Miller's theory after issuing debt to repurchase shares.

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FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

You're reporting an error for "FM – L2 – Q9 – Financial Policy Decisions"

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