a) A company has no debt and its total value is £160,000,000. Ignoring corporate

Question

a) A company has no debt and its total value is £160,000,000. Ignoring corporate tax, what will the company's value be, if it sells £50,000,000 in debt?

Suppose now that company's tax rate is 30%, what will its overall value be if it sells £50,000,000 in debt? Assume debt proceeds are used to repurchase equity.

b) Matthew's portfolio consists of 200 shares of Kellogg. The current share price is £105. The company has announced a dividend of £1.50 per share with an ex-dividend rate date of 25 June. Assuming no taxes, how much will Matthew's share be worth on 25 June?

Explanation / Answer

Answer(A)- Value of the Company will be = Total value + Debt (Tax rate)

Value of the Company =  £160,000,000 + £50,000,000 (.30)

Value of the Company = £175000000

Answer(B)- As there is no tax, share price will be reduced by the dividend amount.

New share price = 105 - 1.50 = £103.50

Total Shares value =   200 * £103.50 = £20700

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