QUESTION 3 3.1. Mega plc is a global oil exploration company and operates in sev

Question

QUESTION 3 3.1. Mega plc is a global oil exploration company and operates in several different countries. The company has never borrowed before but feels that in order to maximize growth and increase value, a debt issue is required. Currently the firm has 60 million shares outstanding with a share price of £2. The profit before taxes is forecast to be £30 million. The firm requires £40 million to fund its expansion plans The firm feels that it could borrow £50 million and use the additional £10 million to also buy back shares in the company. The corporate tax rate is 25%. Continued overleaf... 4 a) Determine the expected earnings per share for the company before and after b) Determine the value of Mega plc after restructuring and the value of its equity c) Using your answer for question (a), discuss the use of earnings per share as a (10%) the debt issue. using the Modigliani-Miller model with corporate taxes. basis for financial decision taking.

Explanation / Answer

For rest data the intrest rate of borrowings is required which is not available

Current Outstanding No of Shares 60 Million Share Price £2.00 PBT (In EUR) 30 Million Tax Rate 25% PAT (In EUR) 22.5 Millions EPS (expected- No change)
PAT/No. Of Equity Shares 0.375 Assuming the Intrest payement is already adjusted Current Outstanding No of Shares
(10 million buyback) 50 Million Share Price £2.00 PBT (In EUR) 30 Million Tax Rate 25% PAT (In EUR) 22.5 Millions EPS (expected-After Debt)
PAT/No. Of Equity Shares 0.45

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