The following information relates to two companies which trade in a Modigliani and Miller world: Sanlam Santam
Question:
The following information relates to two companies which trade in a Modigliani and Miller world:
Sanlam Santam
Cost of equity 20% 18%
Cost of debt 12% -
Dividends 200 000 432 000
Interest 150 000 -
Shares 1000 1000
Required:
(a) Calculate the WACC for Sanlam and Santam. (4 marks)
(b) Calculate the correct value for Sanlam shares assuming that Santam’s shares are correctly valued. (4 marks)
(c) Explain what is meant by the term ‘arbitrage’ with reference to the M&M theory. (4 marks)