ou are required to answer the following questions: What is your proportional ownership in MombayTours Ltd.? What is the total cash inflow and rate of return on your investment in MombayTours Ltd.? Using homemade leverage, how demonstrate how an investor with 150 shares in Roscoe Tours Ltd, the unlevered firm can enjoy the same payoff, i.e., total cash flows as that a shareholder with 150 share
Roscoe Tours Ltd and Storebay Tours Ltd operate in the same geographical area and are close competitors. They are simply mirror images of each other and their financial records reflect the same as well in terms of an identical EBIT of $160,000. However, the fundamental difference is just that while Roscoe Tours is fully financed by equity, Mombay Tours follows a D/E ratio of 1. Both firms have assets worth $800,000 each and a share price of $25 each. The current market interest rate is 8% and both firms are enjoying a tax holiday because of the government policy to promote the tourism sector. Both Roscoe Tours Ltd and Mombay Tours Ltd follow a 100% dividend payout policy. As a young graduate, you are aware that the economy will bounce back in the coming year and knowing that leverage magnifies gains in good times, you have decided to invest $50,000 in Mombay Tours Ltd.
You are required to answer the following questions:
- What is your proportional ownership in MombayTours Ltd.?
- What is the total
cash inflow and rate ofreturn on your investment in MombayTours Ltd.? - Using homemade leverage, how demonstrate how an investor with 150 shares in Roscoe Tours Ltd, the unlevered firm can enjoy the same payoff, i.e., total cash flows as that a shareholder with 150 shares enjoy inS torebay Tours Ltd.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
