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)