Reference no: EM132616275
Two firms, A Ltd., and B Ltd., operate in the same industry. The two firms are similar in all aspects except for their capital structures. The following additional information is available:
1. A Ltd., is financed using Sh.100 million worth of ordinary shares.
2. B Ltd., is financed using Sh.50 million in ordinary shares and Sh.50 million in 7% debentures.
3. The annual earnings before interest and tax are Sh.10 million for both firms. These earnings are expected to remain constant indefinitely.
4. The cost of equity in A Ltd., is 10%.
5. The corporate tax rate is 30%.
Required:
Problem a: Using the Modigliani and Miller (MM) model, determine the following:
(i) The market value of A Ltd., and B Ltd.
(ii) The weighted average cost of capital of A ltd and B ltd.
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