Question 2: Capital structure and dividend policy. 25 marks 1.1 The following information relates to two companies which trade in a Modigliani and Miller world: Sanlam Santam Cost of equity 20% 18% Cost of debt 12% - Dividends 200 000 432 000 Interest 150 000 - Shares 1000 1000 Required: (a) Calculate the WACC for Sanlam and Santam. (4 marks) (b) Calculate the correct value for Sanlam shares assuming that Santams shares are correctly valued. (4 marks) (c) Explain what is meant by the term arbitrage with reference to the M&M theory. (4 marks)

1.2 Suppose Sanlam ltd wishes to finance a major restructuring project whose total cost is N$75 Million. The company follows a residual policy on dividends. Earnings for the coming year are expected to be N$60 Million and the company maintains a debt to equity ratio of 0.5 (50%). An extract from the statements of financial position is shown below: Statement of Financial position extract: 2018 2017 Equity: Ordinary shares of N$0.50 each N$5 000 000 N$5 000 000 Required: (a) Calculate the following: (i) dividend per share; (ii) the value of additional debt, and (iii) ordinary share capital to be raised in order to finance the restructuring project. (13 marks)