Question 2 (b)

a) One of the conditions that the M&M Propositions required was for there to be no tax. Briefly discuss whether the introduction of tax decreases or increases the value of a company (3 marks) b) Briefly explain how an increase in the amount of debt that a company has outstanding may actually decrease the agency costs caused by the conflict between managers and shareholders (4 marks) c) Rose Ltd has $25 million of debt outstanding and $75 million of equity outstanding. The cost of equity is 12%, cost of debt is 7% and company tax rate is 30%. What is the weighted average cost of capital for Rose Ltd