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QUESTION 4 Alpha Ltd and Omega Ltd are identical in all aspects except for their capital structures. Alpha Ltd is 100% equity financed and has
QUESTION 4 Alpha Ltd and Omega Ltd are identical in all aspects except for their capital structures. Alpha Ltd is 100% equity financed and has an unlevered cost of equity (kw) of 16%. Its current before interest and after tax cash earnings (Xo) are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has $400,000 of debt in its capital structure and expects to maintain this level of debt permanently. Assume the corporate tax rate paid by both companies is 30% and the cost of debt (kw) is 7% p.a. (a) Assume Miller and Modigliani (MM) perfect capital markets with no taxes. (i) What is the value of Omega Ltd? (2 marks) (ii) What is the WACC for Omega Ltd? (1 mark)
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