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A firm generates pre-tax earnings of £2,000,000 per year. Currently it has issued 1 million shares which sell for £10 each and no debt.
It is proposing a deal, it will borrow £5 million at 8% and buy back 500,000 shares and cancel them. The corporate tax rate is 30%. Calculate the following
a) The share price after the deal
b)The WACC (Weighted Average Cost of Capital) both pre and post the dealUnless there is more information given, this question cannot be asked at Paper F9.
It require the use of the formulae produced by Modigliani and Miller. You cannot be examined on the formulae in Paper F9.
Thanks! I would like to know how to answer this question using the formulae produced by M&M.
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