exercise_10

exercise_10 - MA826 FINANCE ND FINANCIAL REPORTING EXERCISE...

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MA826 FINANCE ND FINANCIAL REPORTING EXERCISE 10 1. Assume a perfectly competitive market with no corporate or personal taxes. Companies A and B each earn gross profits of P and differ only in their capital structure-A is wholly equity-financed and B has debt outstanding on which it pays a certain $100 of interest each year. Investor X purchases 10 percent of the equity of A. (a) What profit does X obtain? (b) What alternative strategy would provide the same result? (c) Suppose investor Y purchases 10 percent of the equity of B. What profits does Y obtain? (d) What alternative strategy would provide the same result? 2. Mr X owns 50,000 shares of a company with a market value of £2 per share, or £100,000 overall. The company is currently financed as follows: BOOK VALUE Equity £2 million ( 8 million shares) Short- term loans £2 million The company announces that it is replacing £1 million of short-term debt with an issue of ordinary shares. What action can Mr X take to ensure that he is entitled to
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exercise_10 - MA826 FINANCE ND FINANCIAL REPORTING EXERCISE...

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