a Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered cost of equity of 12%. Alpha’s current before interest and after tax cash earnings are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has 500,000 shares outstanding and $60,000 in debt in its capital structure at an interest rate of 7% p.a. Omega expects to maintain this level of debt permanently. Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega. What is the WACC for Omega Ltd? According to MM Proposition 1, what is the stock price for Omega Ltd?
Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered
Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega.
- What is the WACC for Omega Ltd?
- According to MM Proposition 1, what is the stock price for Omega Ltd?
- Suppose the equity of Omega Ltd was valued at $1 million. show how you could make a riskless arbitrage profit if you wanted a 10% ownership stake of the firm. Give a full explanation of the transactions needed and the amount of profit to be made.
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