plc and Jay plc are two companies that are facing the same business risk. They have both experienced significant growth in recent years although the efficiency of the current financial markets is questionable. Dee plc had planned to continue the companys growth trend but the Covid-19 pandemic has restricted that plan to some extent. However, a favourable climate for borrowing has helped fuel the growth, enabling the management to invest heavily in the one specific sector. Both Dee plc and Jay plc continue to distribute all earnings to their shareholders.

Dee plc has operating earnings before interest and tax of 104 million per annum. The company is financed by 61 million ordinary shares with a market value of 420p each and by 204 million 10% irredeemable debentures with a current market value of 150 per 100 nominal.

Jay plc is financed by 16 million ordinary shares with a market value of 610p each and by 64 million 5% irredeemable debentures currently trading at 75 percent. Jay plc has operating earnings before interest and tax of 27.5 million per annum.

Mr Tune is a shareholder in Dee plc, with a holding of 12,810 ordinary shares. Mr Tune is thinking of selling his shares in Dee plc and buying shares in Jay plc, as he believes he may be able to make a capital gain by doing so. Mr Tune is confident that he is able to borrow or lend at a very competitive rate of interest.

The rate of corporation tax is 25%.

Required

Please note that your response should be structured in a way that provides useful information to the decision-maker. Hence, the marks awarded include those for clear problem introduction, full explanations and critical analysis relevant to the finance decision context, not just the computations alone.

The following should be included within your response:

1) Derive the after tax cost of equity, the after tax cost of debt and the overall weighted average cost of capital for both Dee plc and Jay plc. Comment on your findings. 40 marks

2) Mr Tune has asked for your advice as he wishes to switch his investment from Dee plc to Jay plc but retain his investment profile. Carefully explain showing all calculations what actions Mr Tune would have to take in order to achieve this position. Also, calculate Mr Tunes income position in Dee plc and Jay plc both before and after the switch. Would you advise Mr Tune to go ahead with such a switch? Fully explain your answer. 60 marks