The following is the data regarding two companies ‘X’ and ‘Y’ belonging to the same risk class.
Company X Company Y
No. of ordinary shares 90000 150000
Face value of shares Rs. 10 Rs.10
Market price per share Rs.1.20 Rs.1.00
6% debentures Rs. 60000 -
Profit before interest Rs.18000 Rs.18000
All profits after debentures interest and distributed as dividends.
Examine how under Modigliani and Miller approach an investor holding 10% of shares in company X will be better off in switching his holdings to company Y.
Please provide the detailed calculations and don’t just provide the answer.
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