Merlot plc is financed by 10 million shares, whose current market value is 2.40 a share, and

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Merlot plc is financed by 10 million shares, whose current market value is £2.40 a share, and 10 per cent loan notes with a nominal and market value of £14 million. The business plans to issue additional shares to raise £14 million and to use the cash generated to pay off the loan notes. The corporation tax rate is 30 per cent.

(a) Making Modigliani and Miller’s assumptions (in a world with taxes), how would the restructuring described affect the value of the business?

(b) If the shareholders gain, who will lose, or if the shareholders lose, who will gain?

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Business Finance

ISBN: 9781292134406

11th Edition

Authors: Eddie McLaney

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