A company is characterised by a constant debt ratio of 50%, has risk-free debt capital and expects a sustainable annual operating cash flow of 15 million. Assume that Modigliani and Miller's assumption - with the exception of income taxes of 30% - are fulfilled and assume that the after-tax weighted average cost of capital (WACC) is 15% p.a., the risk-free interest rate is 5% p.a. and the expected capital market return is 12% p.a.
(A) What is the return required by equity investors?
(b) What is the equity beta of the company?
(c) What is the market value of the total capital and the equity of this company?
Assume that the firm reduces its leverage to 30%.
(d) What would be the after-tax weighted average cost of capital (WACC)?
( E) What is the market value of the total capital of this company?
(f) What is the market value of this company's equity?
(g) Who are the beneficiaries or the sufferers of the change in the leverage ratio ( with justification)?