Help me tutors

Suppose we have two companies A and B with the same business risk and annual operating profit of Elm and the following capital structures: A B Equity 10m 8m 8% debt 4m 12m You are going to show how arbitrage can make the value of the companies equal. Mr Jones has E400,000 to invest. Investing in these two companies and borrowing and lending in the risk-free market are the only choices available. (i) What will Mr Jones earn if he puts all his savings into Company B? (ii) What will Mr Jones earn if he puts all his savings into Company A? (iii) Company A is ungeared and Company B is geared. The gearing of a portfolio is a measure of its risk, so a portfolio of Company A's shares is less risky than a portfolio of Company B's shares. Mr Jones can increase the riskiness of a portfolio that includes Company A's shares by borrowing EX in the risk-free market (which is assumed to be available to both companies and individuals at the same rate) and using all the available funds ( $400,000+ EX ) to invest in Company A's shares. Find the value of X that makes the two investment portfolios equally risky. (iv) For this value of X compare the expected returns from each of the two investment portfolios. (V) What will happen to the market prices of the shares in Company A and in Company B? (vi) Assuming that Company B's shares take all the adjustment, how far will the market price of Company B's shares fall? Explain.Spire ple has a debtequity ratio of 1:1. The risk-free rate of return is 4%, the equity risk premium derived from the market is 6% and the gross cost of debt is 4%. Its beta is 1.5 and assume any profit is taxed at 30%. (i) Calculate its weighted average cost of capital. (ii) Spire is concerned about its high debtequity ratio. If Spire were to repay all debt, what would be the required return to equity? (iii) Spire decides against repaying all debt but instead embarks on a rights issue in order to reduce its debtequity ratio from its current position of 1:1 to a new position of 1:3. Calculate its weighted average cost of capital after the rights issue. State any assumptions that you make.Exesses is a family-owned company that is in the process of recovering from a major corporate scandal. Exesses is a substantial business that is not quoted. None of its shareholders owns more than 5% of the equity shares. None of the shareholders is able to take an active role in the company's management. Exesses' directors were all forced to step down because of the discovery that the directors had been overstating reported profits, which had the effect of inflating their profit-related bonuses. The directors also provided themselves with lavish lifestyles at the company's expense. For example, the company provided chauffeur-driven limousines to transport the directors on both business and personal travel. The entire board of Exesses has resigned. The shareholders have met and have appointed a new chairman and a chief executive. Neither of these appointees have had anything to do with Exesses in the past. They have both agreed that their first priority is to appoint a new board and to structure the management arrangements so that the shareholders' confidence is restored. The chairman has suggested that the new board should be structured as follows: The chairman will work on a part-time basis and will be responsible for the management of the board, including chairing board meetings. The chairman will be paid a fixed annual salary that offers an appropriate rate for the time that he is expected to commit to the company. The chief executive will be employed on a full-time basis to manage the company itself and will receive both a substantial salary and a profit-related bonus. . Four additional full-time directors will be appointed to take charge of particular areas such as marketing and finance. Each will receive a similar package to the chief executive. Two part-time directors will be appointed to participate in board meetings and to review corporate strategy. They will be paid a fixed salary. . The chief executive and each of the full-time directors will receive a 5% shareholding after satisfactorily completing three years on Exesses' board. The chairman and the two part-time directors will appoint a new external audit firm. They will negotiate a contract with a much larger firm than the outgoing auditor and will pay a larger fee for the new auditor's services. (i) Discuss the suitability of the proposals for the appointment and remuneration of the new board of directors from the perspective of maintaining shareholder confidence. [12] (ii) Discuss the implications of appointing a larger and more expensive external audit firm to replace the present auditor. [8] [Total 20]