Question 9 (10 marks)

1. Describe the two Modigliani and Miller propositions, the key assumptions underlying them, and their relevance to capital structure decisions. (4 marks)
2. Lodh Ltd has $500 million of debt outstanding at an interest rate of 10 per cent. What is the present value of the debt tax shield if the debt has no maturity and if Lodh Ltd is subject to a 30 per cent company tax rate? (3 marks)
3. Swann Ltd currently has an equity cost of capital equal to 15 per cent. If the Modigliani and Miller assumptions hold (with the exception of the assumption that there is no tax) and the companys capital structure is made up of 60 per cent debt and 40 per cent equity, then what is the weighted average cost of capital for the company if the cost of debt is 8 per cent and the company is subject to a 30 per cent company tax rate? (3 marks)

Answer 9: (calculate and type your answer)

1. [Answer here]

2. [Answer and show workings here]

3. [Answer and show workings here]