3. Tucana plc and Andromeda plc both operate in the same industry, television production, and experience the same risk. While Tucana is financed by a combination of debt and equity. Andromeda is an all equity company. Details of their financial structure and cash flow situations follow. Tucana plc has 200 million shares with nominal and current market values of 1.00 and 2.50 (ex div.) respectively. The company also issued a 7% irredeemable debt of 300 million, currently valued at par. Andromeda plc on the other hand, has 400 million shares, valued at 2.10 (ex div.) each; these shares were issued at a nominal value of 0.75. Both companies generate a net cash flow per annum of 100 million, which is expected to continue into the foreseeable future. All cash flows are distributed to shareholders as dividend payments at the end of each year. Ashra owns 80,000 shares in Andromeda plc. She likes the investment in Andromeda plc because it generates a regular income for her. She is also is happy to accept the risk that this investment generates for her. Ashra has, however, been told by a friend that she could generate a better return by changing her investment from Andromeda plc to Tucana plc whilst maintaining her overall level of risk Required: (a) Separately calculate the cost of debt and equity and the weighted average cost of capital of Tucana plc and Andromeda plc. Comment on your results. (9 marks) (b) Calculate Ashra's current financial position and show how she can improve it by moving her investment from Andromeda plc to Tucana plc. (8 marks) (c) Assume that several investors from Andromeda plc have taken action like that you suggested for Ashra. Also assume that the prices of debt and equity of Tucana plc are in equilibrium. Comment on the current value of the shares in Andromeda plc and calculate the equilibrium price per share. (4 marks) (d) Comment on the effect of a corporate tax rate of 30% on your calculations in (a) and (c) above. Assume that both companies are liable to pay taxes. You are not expected to conduct further computations. (4 marks) Notes: 1. For parts (a) to (c) ignore taxation. 2. Assume that investors can borrow at the same rate as companies or can invest in similar risk free investments to earn the same rate of return