Being a finance student, you have to apply and analyze “M&M Propositions” in Model Company Limited (MCL) which has weighted average cost of capital (ignoring taxes) of 14 percent and it can borrow funds at 6 percent. Its existing capital structure is Rs. 1 Million with debt-equity ratio
at 40:60. MCL’s management is desirous to restructure this ratio as
70:30. The country’s central financial authorities have no objection on
this desired capital structure.
Required:
1. Compute the cost of equity of MCL before and after restructuring.
2. Compute weighted average cost of capital (WACC) before & after restructuring.
3. Did you find “M&M propositions” true in above cases (question 01 and 02). Why?
Solution idea from text book here
Required:
1. Compute the cost of equity of MCL before and after restructuring.
2. Compute weighted average cost of capital (WACC) before & after restructuring.
3. Did you find “M&M propositions” true in above cases (question 01 and 02). Why?
Solution idea from text book here
