- 6 Marks
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)
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