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Question 12 Company A and B are identical companies except for their capital structure. The capital structure of each company is as follows: Company A
Question 12 Company A and B are identical companies except for their capital structure. The capital structure of each company is as follows: Company A Equity 400 million 8% Bank Loan 40 million 9 % Debentures 160 million 11.2% Unsecured Loan 200 million Company B Equity 300 million 8% Bank Loan 150 million Additional information Prevailing tax rates in the country are at 40%. The risk free interest rate is 6%. Market expected returns are at 12%. The beta of Company B is 1.5 . (a) State the Modigliani & Miller propositions on the Weighted Average Cost of Capital (WACC) of two identical companies. (1) (b) Calculate the Beta for Company A under the Modigliani & Miller propositions. (3) (c) Company A wants to bring its beta equal to company B's beta of 1.5. How much additional equity should it raise? (5) Question 12 Company A and B are identical companies except for their capital structure. The capital structure of each company is as follows: Company A Equity 400 million 8% Bank Loan 40 million 9 % Debentures 160 million 11.2% Unsecured Loan 200 million Company B Equity 300 million 8% Bank Loan 150 million Additional information Prevailing tax rates in the country are at 40%. The risk free interest rate is 6%. Market expected returns are at 12%. The beta of Company B is 1.5 . (a) State the Modigliani & Miller propositions on the Weighted Average Cost of Capital (WACC) of two identical companies. (1) (b) Calculate the Beta for Company A under the Modigliani & Miller propositions. (3) (c) Company A wants to bring its beta equal to company B's beta of 1.5. How much additional equity should it raise
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