Can you please answer questions 4 and 5
Question 3 Miller and Modigliani on Capital Structure (a) Dorothy Ltd earns an EBIT of $18 million, on average every year and this is not expected to change. Dorothy's all-equity cost of equity is 12% after having been adjusted for all taxes. The tax rates are: Company tax rate Personal tax rate on equity distributions Personal tax rate on interest income 30% 30% 30% Dorothy Ltd has $15 million of debt on which the firm pays 6% interest before tax. Required (i) Assuming Dorothy Ltd pays all available net income out as dividends, what is the unlevered value of the firm? (2 marks) (ii) Assuming Dorothy Ltd pays all available net income out as dividends, what is the levered value of the firm? (2 marks) (iii) Assume now that Dorothy Ltd has a payout ratio of 60%. Recalculate both the unlevered value of the firm and the levered value of the firm. (4 marks) (iv) Assume now that the firm still pays out 60% of net income as dividends, but that the dividends are fully covered by imputation credits. What is the value of the firm, unlevered and levered now? (4 marks) (v) Please explain, in a short paragraph, what your results illustrate about the nature of Miller and Modigliani's proposition governing the value of the firm with both company taxes and personal taxes. (2 marks) $18 Million ;) EBIT Less : Interest o (Unlevered company does not have debt) ERT $ 18 Million Less : Tax@ 30% - $ 5.40 Million million Net Income $ 12-60 Un levered Value of firm $ 12.60 million 10.12 $ 105 Million if As per MM theory Levered rate firm Value Un levered Value firm + Debt * Fax 30 % a payout ratio of $ 12.60 million 60% $ 105 Million + $ 15 Million $ 109.50 million iw it there 60 % Net income $12.60 million (as Earlier) Dividend $ 7.56 million th levered Value of firm (assuming that the EBIT does not change Every year ) $7.56 Million so $63 Million Levered firm Value On levered Value & firm Debt * Tax rate $63 Million + $15 Million $ 67.50 Million 0.12 + # 30 y. Question 3 Miller and Modigliani on Capital Structure (a) Dorothy Ltd earns an EBIT of $18 million, on average every year and this is not expected to change. Dorothy's all-equity cost of equity is 12% after having been adjusted for all taxes. The tax rates are: Company tax rate Personal tax rate on equity distributions Personal tax rate on interest income 30% 30% 30% Dorothy Ltd has $15 million of debt on which the firm pays 6% interest before tax. Required (i) Assuming Dorothy Ltd pays all available net income out as dividends, what is the unlevered value of the firm? (2 marks) (ii) Assuming Dorothy Ltd pays all available net income out as dividends, what is the levered value of the firm? (2 marks) (iii) Assume now that Dorothy Ltd has a payout ratio of 60%. Recalculate both the unlevered value of the firm and the levered value of the firm. (4 marks) (iv) Assume now that the firm still pays out 60% of net income as dividends, but that the dividends are fully covered by imputation credits. What is the value of the firm, unlevered and levered now? (4 marks) (v) Please explain, in a short paragraph, what your results illustrate about the nature of Miller and Modigliani's proposition governing the value of the firm with both company taxes and personal taxes. (2 marks) $18 Million ;) EBIT Less : Interest o (Unlevered company does not have debt) ERT $ 18 Million Less : Tax@ 30% - $ 5.40 Million million Net Income $ 12-60 Un levered Value of firm $ 12.60 million 10.12 $ 105 Million if As per MM theory Levered rate firm Value Un levered Value firm + Debt * Fax 30 % a payout ratio of $ 12.60 million 60% $ 105 Million + $ 15 Million $ 109.50 million iw it there 60 % Net income $12.60 million (as Earlier) Dividend $ 7.56 million th levered Value of firm (assuming that the EBIT does not change Every year ) $7.56 Million so $63 Million Levered firm Value On levered Value & firm Debt * Tax rate $63 Million + $15 Million $ 67.50 Million 0.12 + # 30 y
