Merlot plc is financed by 10 million shares, whose current market value is 2.40 a share, and
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Merlot plc is financed by 10 million shares, whose current market value is £2.40 a share, and 10 per cent loan notes with a nominal and market value of £14 million. The business plans to issue additional shares to raise £14 million and to use the cash generated to pay off the loan notes. The corporation tax rate is 30 per cent.
(a) Making Modigliani and Miller’s assumptions (in a world with taxes), how would the restructuring described affect the value of the business?
(b) If the shareholders gain, who will lose, or if the shareholders lose, who will gain?
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Modigliani and Millers Propositions under their assumptions state that in a world with taxes the val...View the full answer
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