ES MAILINGS REVIEW VIEW FOXIT PDF 1 Normal No Space Heading 1 Heading 2 Title Subtitle Subtle Em Paragraph Styles (a) Companies A and B have the following capital structure. Both companies have a market value of $500 million and a cost of equity of 11%. Company A: Equity of 40% and Debt of 60% Company B: Equity of 60% and Debt of 40% 1. According to Modigliani and Miller (MM) world with no taxes, which company would be considered to have the higher value? Why? (3 marks) If the financial leverage is increased by 10% for each company and there are corporate taxes, what changes would there be, if any, to the companies' value and WACC? (3 marks) ill. If the financial leverage is increased by 20% for each company, what would happen to the companies' cost of equity and WACC, assuming an MM world with no taxes? (4 marks) (b) Company XYZ Ltd's business is in the travel industry. They have experienced significant financial losses as a result of COVID-19. These financial losses have caused the company to defer payments of dividends to shareholders in order to conserve cash and the sale of many of its retail outlets to generate cash flow to support operating payments as a result Using relevant theory from your leaming materials, explain the impact of increased financial distress costs on the value of XYZ Ltd. What would be the optimal level of XYZ's debt in their capital structure? (10 marks) BI