Acme Co operates under the assumptions of Modigliani and Miller. Acme's expected earnings (before interest) is...
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Acme Co operates under the assumptions of Modigliani and Miller. Acme's expected earnings (before interest) is $5,000,000, all of which are paid out as dividends. The value of Acme's assets is $50,000,000. Acme has no debt and has 10,000,000 shares outstanding that are trading share. for $5 per (a) A bank offers a proposal to Acme, where Acme would take a loan of $35,000,000 at an annual interest rate of 4% from the bank, which would be used to repurchase its shares. What will be the change in Acme's rate of return on equity under this bank's proposal? (Show all your work. Your answer must be handwritten.) (5 marks) (b) Mary owns 30 shares in Acme and argues that it is unnecessary for Acme to borrow from the bank since she can also borrow from the bank under the same conditions. If Mary borrows money from the bank to buy additional shares of Acme so that Mary's investment outcome is identical to the bank's proposal, how much interest will Mary need to pay the bank? (Show all Acme Co operates under the assumptions of Modigliani and Miller. Acme's expected earnings (before interest) is $5,000,000, all of which are paid out as dividends. The value of Acme's assets is $50,000,000. Acme has no debt and has 10,000,000 shares outstanding that are trading share. for $5 per (a) A bank offers a proposal to Acme, where Acme would take a loan of $35,000,000 at an annual interest rate of 4% from the bank, which would be used to repurchase its shares. What will be the change in Acme's rate of return on equity under this bank's proposal? (Show all your work. Your answer must be handwritten.) (5 marks) (b) Mary owns 30 shares in Acme and argues that it is unnecessary for Acme to borrow from the bank since she can also borrow from the bank under the same conditions. If Mary borrows money from the bank to buy additional shares of Acme so that Mary's investment outcome is identical to the bank's proposal, how much interest will Mary need to pay the bank? (Show all
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Related Book For
Corporate Finance and Investment decisions and strategies
ISBN: 978-1292064062
8th edition
Authors: Richard Pike, Bill Neale, Philip Linsley
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