In a Modiglian and Miller world with no taxes, companies X and Y are identical in all respects, except that company X pays £20m in dividends whereas Y pays no dividends.As illustrated in the table below, both companies have no cash freely available after their investment needs are accounted for. Assume for simplicty that both firms are 100% equity financed and that X finances all its dividends by issuing equity. Which of the following statements is inaccurate? Firm Y X Firm's value before dividends (in £ m) 100 100 Free cash flow before dividends 0 0 Dividends 0 20 Cash deficit after dividends (to be made up for by issuing equity) 0 -20 Firm value after dividends 100 80 Firm value after equity issue 100 100
In a Modiglian and Miller world with no taxes, companies X and Y are identical in all respects, except that company X pays £20m in dividends whereas Y pays no dividends.As illustrated in the table below, both companies have no cash freely available after their investment needs are accounted for. Assume for simplicty that both firms are 100% equity financed and that X finances all its dividends by issuing equity. Which of the following statements is inaccurate?
| Firm | Y | X |
| Firm's value before dividends (in £ m) | 100 | 100 |
| 0 | 0 | |
| Dividends | 0 | 20 |
| Cash deficit after dividends (to be made up for by issuing equity) | 0 | -20 |
| Firm value after dividends | 100 | 80 |
| Firm value after equity issue | 100 | 100 |
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If both X and Y initially have 10m shares outstanding, an investor holding 10 shares in X needs to buy 2.5 additional shares after dividends to replicate the position of someone who holds 10 shares in Y |
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If both X and Y initially have 10m shares outstanding, an investor holding 10 shares in Y needs to sell two of their shares to replicate the position of someone who holds 10 shares in X |
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An investor holding 10% of company Y can replicate their position by selling their stake, buying a 10% stake in company X and then selling a number of shares equivalent to 10% of X's dividends |
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Investors are indifferent between holding shares in X or in Y |
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