QUESTION ONE a) Basing your argument on Modigliani and Miller (1958), clearly illustrate whether capital structure matters and give the assumptions associated with it. (10 Marks) b) A Limited has the following capital structure: 2,000,000 ordinary shares @ 25 1,000,000 15% preference shares @ 40

QUESTION ONE a) Basing your argument on Modigliani and Miller (1958), clearly illustrate whether capital structure matters and give the assumptions associated with it. (10 Marks) b) A Limited has the following capital structure: 2,000,000 ordinary shares @ 25 \1,000,00015 preference shares @ 40 \100,00010 bond @ 100 The market price is Sh 55, Sh 70 and Sh 140 for ordinary shares, preference shares and bond respectively. An ordinary share was paid a dividend of Sh 8 in the previous year and the dividends are expected to grow at \4. a indefinitely. Tax rate is given at \30. Required (i) The components cost of capital. (4 Marks) (ii) The component weight of each capital (4 Marks) (iii) WACC (2 Marks)