Task 1: Capital structure and dividend policy A large travel company owns a resorts and hotels. The CFO wants to change the company's capital structure. The change will mean that debtratio (debt-to-value-ratio) is increased to 50% by a large issuance of new debt and an extraordinary payout to shareholders. The company's marginal tax rate is 30%. It has 200 million outstanding shares with the current price of $36 per share. Market value of the company's total debt is $1.800 million, spread over outstanding bond with a market value of $850 million and a creditline with the company's main bank where floating rate is 5% and outstanding debt is $950 million.

A) What is the current (debt-to-value ratio)?

B) What would the value of the company have been if it had not been leveraged?

C) How much debt is required to implement the new capital structure?

D) What is the effect on the number of shares outstanding and how big it is extraordinary dividend?

E) What is the impact on the stock price after the extraordinary dividend has been paid?

(F) An important director writes in a memo that the propose, support the change in capital structure will mean that our income is reduced and the share price being Iow. How should the CFO respond?

(G) How does this relate to Miller and Modigliani's result about the irrelevance of dividend