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Question 5 Taylor plc has a current equity market capitalisation of 240 million and corporate bonds in issue with a market value of 80 million.
Question 5 Taylor plc has a current equity market capitalisation of 240 million and corporate bonds in issue with a market value of 80 million. Its optimal level of financial gearing is thought to be 30% It is considering raising additional capital of 70 million so that it can take advantage of acquisition opportunities as they arise but is unsure whether it should raise equity or bonds. Required: (a) Advise the company of the primary considerations to take into account about the alternate sources of additional capital that are under consideration. (8 marks) (b) Calculate the company's current level of financial gearing and, with reference to Modigliani and Miller's with-tax theory of capital structure, clearly explain the impact upon the company's weighted average cost of capital if it were to raise the additional capital by issuing equity. (5 marks) (c) With reference to the trade-off theory of capital structure, clearly explain the impact on the company's market value if it were to raise the additional capital by issuing bonds. (7 marks) (Total 20 marks)
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