Question: Currently, Minelli Enterprises Limited does not use financial leverage, and its total capital is $120 million with a share price of $1.20 each. The company is considering refinancing by issuing $24 million of debt, which pays an annual coupon rate of 6.25% and using that money to buy back 20% of the companys ordinary shares. Minelli Enterprises Ltds earnings before interest and tax (EBIT) are expected to be constant for the foreseeable future, and all profits are paid out as dividends. Currently, the weighted average cost of capital is 9.25%.

Required: (a) Using the assumptions of Modigliani and Miller, if the company goes ahead with the refinancing option, calculate the cost of equity capital. (Assumption: the company operates in a no-tax environment). (b) Using the assumptions of Modigliani and Miller, if the company goes ahead with the proposal, calculate the following: (Assumption: The company tax rate is 28%) i. The value of the company ii. The debt to equity ratio of the company iii. The new cost of equity capital iv. The revised weighted average cost of capital. (c) If you were the financial manager of Minelli Enterprises Ltd, will you use more and more leverage to increase the firm value indefinitely and lower its cost of capital continuously? Explain why or why not.