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Question - The two parts of this question all refer to the same information as follows.
Ariella owns a company in The Bahamas which pays no tax. It has a value of $15 million and it is returning 18% per annum. She owns it outright (no debt). Ariella agrees to sell the firm to Charlie for $15 million. Charlie will fund two thirds of this from his own cash and borrow one third using a bank loan which pays interest at 5% per annum. The takeover does not change the risk characteristics of the business.
Required -
(a) Determine the company's rate of return after the takeover.
(b) Determine the rate of return that Charlie should receive on his investment.
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Why interest which Beg thought of paying to his father on money borrowed by Beg cannot be shown as part of ?rm's expenses? Provide the example.
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