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 1009% equity financed and that X finances all its dividends by issuing equity. Which of the following statements is inaccurate? Firm Firm's value before dividends (in £ m) Free cash flow before dividends Dividends Cash deficit after dividends (to be made up for by issuing equity) Firm value after dividends Firm value after equity issue Y 100 100 20 -20 80 100 100 100 O 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 O 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 O An investor holding 10% of company Y can replicate their position by selling their stake, buying a 10% stake in company X and selling a number of shares equivaient to 109% of X's dividends O Investors are indifferent between holding shares in X or iny
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 1009% equity financed and that X finances all its dividends by issuing equity. Which of the following statements is inaccurate? Firm Firm's value before dividends (in £ m) Free cash flow before dividends Dividends Cash deficit after dividends (to be made up for by issuing equity) Firm value after dividends Firm value after equity issue Y 100 100 20 -20 80 100 100 100 O 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 O 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 O An investor holding 10% of company Y can replicate their position by selling their stake, buying a 10% stake in company X and selling a number of shares equivaient to 109% of X's dividends O Investors are indifferent between holding shares in X or iny
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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?
Y
100
Firm
Firm's value before dividends (in £ m)
Free cash flow before dividends
Dividends
Cash deficit after dividends (to be made up for by issuing equity)
Firm value after dividends
Firm value after equity issue
X
100
10
20
|-20
80
100
100
100
O 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
O 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
O An investor holding 10% of company Y can replicate their position by selling their stake, buying a 106 stake in company X and selling a number of shares equivalent to 109% of X's dividends
O Investors are indifferent between holding shares in X or in Y
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