SP2 - Advanced Corporate Finance - Accounting and Finance Assignment Help

Assignment Task

Question 1

Baynetration Ltd and Worldwide Ltd operate under the Miller and Modigliani conditions (without tax). The two firms are identical except for their capital structures. Each of the companies have annual net operating cash flows of $500,000. The market value of Baynetration debt is $2 million. The interest rate is 9% per annum. Baynetration has 3.2 million shares on issue. Their current market price is 59 cents per share. Worldwide has no debt. It has 1.5 million shares on issue. The market piece is $2.45 per share. Jari Salo owns 200,00 shares of Baynetration.

a) What is the market value of Jari’s investment?

b) What is the current return on his investment?

c) What is the risk of his investment, as measured by the debt-equity ratio?

d) Show that each of the following strategies is an arbitrage:

(i) Sell the 200,000 shares in Baynetration. Borrow $125,000and invest all of it in Worldwide shares.

(ii) Sell the 200,000 shares in Baynetration. Borrow $85,672 and invest the whole proceeds in Worldwide shares.

(iii) Sell the 200,000 shares in Baynetration. Spend $9798. Borr

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