Light Speed plc requires £1,500,000 to fund a new project. The firm expects to earn an EBIT of £200,000 p.a. in perpetuity. Assume the project does not affect the operating risk of the company. The company intends to finance the project by issuing £1 million of 5% debentures at par and £1 million's worth of ordinary shares. The current capital structure of the company is as follows: MV (£'000) Debt (riskless) Equity 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 18% and the risk-free rate is 6%. Ignore income tax. 5,000 Required Return (%) 15,000 6 18 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 the results.

Light Speed plc requires £1,500,000 to fund a new project. The firm expects to earn an EBIT of £200,000 p.a. in perpetuity. Assume the project does not affect the operating risk of the company. The company intends to finance the project by issuing £1 million of 5% debentures at par and £1 million's worth of ordinary shares. The current capital structure of the company is as follows: MV (£'000) Debt (riskless) Equity 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 18% and the risk-free rate is 6%. Ignore income tax. 5,000 Required Return (%) 15,000 6 18 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 the results.

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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