The following information relates to two companies which trade in a Modigliani and Miller world:
                                                     Sanlam                 Santam
Cost of equity                                   20%                     18%
Cost of debt                                     12%                         -
Dividends                                        200 000            432 000
Interest                                            150 000                    -
Shares                                             1000                    1000

Required:

(a) Calculate the WACC for Sanlam and Santam. (4 marks)

(b) Calculate the correct value for Sanlam shares assuming that Santam’s shares are correctly valued. (4 marks)

(c) Explain what is meant by the term ‘arbitrage’ with reference to the M&M theory. (4 marks)