Debt (riskless) MV (£'000) 4,000 Required Return (%) 5 15 Equity 16,000 The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 15% and the risk-free rate is 5%. Ignore income tax. Required: Evaluate how the change of capital structure affects the company value and dividends. You should clearly specify your choice of gearing model and comment on how different models/assumptions made would/would not affect

Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A B Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate Applicable 5% Please answer the following questions a) "The situation described in the table is consistent with the absence of arbitrage opportunities". True or False (T/F)? b) Which one of the two firms is relatively overvalued (A/B)? c) "B's shares carry more risk than A's shares". True or False (T/F)? d) What is the return to an investor holding a 10% stake in B (in £ '000)? e) Consider an investor who wants to purchase a 20% stake in A. If he wished to replicate B's capital structure through homemade leverage, how much would he need to borrow to finance his position in £m? ) What is the…

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Compute the market value of a levered corporation and its cost of capital knowing that the debt ratio is 0.25 and the perpetual EBIT equals 30000 um. Total risk-free debts are in value of 70000 um and the return on debts is 4%. The corporate tax rate is 16%. the return on debts VCORP E Ke WACC ERP FRP