Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered cost of equity of 12%. Alpha’s current before interest and after tax cash earnings are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has 500,000 shares outstanding and $60,000 in debt in its capital structure at an interest rate of 7% p.a. Omega expects to maintain this level of debt permanently. Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega. What is the WACC for Omega Ltd? According to MM Proposition 1, what is the stock price for Omega Ltd? Suppose the equity of Omega Ltd was valued at $1 million. show how you could make a riskless arbitrage profit if you wanted a 10% ownership stake of the firm. Give a full explanation of the transactions needed and the amount of profit to be made.
Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered cost of equity of 12%. Alpha’s current before interest and after tax cash earnings are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has 500,000 shares outstanding and $60,000 in debt in its capital structure at an interest rate of 7% p.a. Omega expects to maintain this level of debt permanently. Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega. What is the WACC for Omega Ltd? According to MM Proposition 1, what is the stock price for Omega Ltd? Suppose the equity of Omega Ltd was valued at $1 million. show how you could make a riskless arbitrage profit if you wanted a 10% ownership stake of the firm. Give a full explanation of the transactions needed and the amount of profit to be made.
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
Related questions
Question
G 2
Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered cost of equity of 12%. Alpha’s current before interest and after tax cash earnings are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has 500,000 shares outstanding and $60,000 in debt in its capital structure at an interest rate of 7% p.a. Omega expects to maintain this level of debt permanently.
Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega.
What is the WACC for Omega Ltd?
According to MM Proposition 1, what is the stock price for Omega Ltd?
Suppose the equity of Omega Ltd was valued at $1 million. show how you could make a riskless arbitrage profit if you wanted a 10% ownership stake of the firm. Give a full explanation of the transactions needed and the amount of profit to be made.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 7 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning