modigliani and miller approach

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Harish

CS Executive

386 Points Joined July 2009

The following is the data regarding two companies ‘X’ and ‘Y’ belonging to the same risk class.

Company X Company Y

No. of ordinary shares 90000 150000

Face value of shares Rs. 10 Rs.10

Market price per share Rs.1.20 Rs.1.00

6% debentures Rs. 60000 -

Profit before interest Rs.18000 Rs.18000

All profits after debentures interest and distributed as dividends.

Examine how under Modigliani and Miller approach an investor holding 10% of shares in company X will be better off in switching his holdings to company Y.

Please provide the detailed calculations and don’t just provide the answer.

Replies (2)

Question2. A company in operation for five years has tangible assets worth Rs.2000000. Maintainable future profits are estimated at Rs.400000. The normal rate of return expected for the company is 15%. It desire in capitalize super profits at 20%. Determine the value of the company.

Please provide solution with detailed calculations.

Harish

CS Executive

386 Points Joined July 2009

Question3. Great Indian Shipping operates cruise ships and is head quartered in Mumbai. The firm had Rs.100 million in pre-tax operating income in the current year, of which it reinvested Rs.25 million. The firm expects its operating income to grow 4% in perpetuity and maintain its existing reinvestment rate. Great Indian Shipping has a capital structure composed of 60% equity and 40% debt. Its cost of equity is 12% and it has a pretax cost of borrowing of 8%. The firm currently faces a tax rate of 40%.

Please calculate the value of the firm with detailed calculations.