Question
b) Consider two companies poncan and woncan are similar in all aspects except for their capital structure i) Poncan company 7.5%, shs.4 m debt ii)
b) Consider two companies poncan and woncan are similar in all aspects except for their capital structure
i) Poncan company 7.5%, shs.4 m debt
ii) Woncan company all equity financed.
iv) Earnings before interest tax for the two companies is sh.900 m
v) Cost of equity for both 15%
vi) Corporation tax rate 4%
Required:
i) Value of the five companies using Net/income approach. (6 marks)
ii) Using MM's model, calculate the equilibrium value for the levered firm.'
iii) Show how much an investor holding 1.0% in the overvalued firm can increase his returns without increasing risk. (7 marks)
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