Finance Discussion
The market value of a company is $32.5 million and its cost of capital is 18% per year. The company proposes to repurchase $5 million of equity and replace it with 13% irredeemable loan stock. The company's earnings before interest and tax are expected to be constant for the foreseeable future.
Required:
1) Using the assumptions of Modigliani and Miller (1958) discuss and demonstrate how this change in the capital structure will affect the value of the company's:
• Cost of Equity
• Cost of Capital
• Market Value
2) using the assumptions of Modigliani and Miller (1961) discuss how the change in the capital structure will affect the value of the company. Assume a corporate tax of 35%?
The response must include a reference list. One-inch margins, double-space, Using Times New Roman 12 pnt font and APA style of writing and citations.