Question
Assume that Pinder Ltd operates in a world under the assumptions of Modigliani and Miller. Pinder Ltd has no debt, has 1 million shares outstanding
Assume that Pinder Ltd operates in a world under the assumptions of Modigliani and Miller. Pinder Ltd has no debt, has 1 million shares outstanding that are trading for $2 per share. Sean, Pinder Ltd's CFO, suggests that the company borrow money to repurchase shares. This way, the rate of return on equity will be higher as long as the rate of return on assets is greater than the cost of borrowing. Sean proposes that the company borrow $0.65 million to repurchase 0.325 million shares. Mary, the CEO of Pinder Ltd, points out that if shareholders borrow on their own, the overall effect will be the same. Since Mary is the CEO, Sean's proposal does not pass. Susan, who holds 3 shares in Pinder Ltd, likes Sean's idea and decides to borrow money to invest in additional shares of Pinder Ltd so that her investment outcome is identical to Sean's proposal. Assume that it is possible to buy fractional shares if necessary. Which of the following values is closest to the amount that Susan will borrow?
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