modigliani and miller approach

Harish (CS Executive) (386 Points)

02 December 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.