m

er as
co
eH w
o.
M&M Pizza Company Value Analysis Executive Summary
rs e
ou urc
FIN 5001: Financial Analysis and Strategy
o
aC s
vi y re
ed d
ar stu
is
Th
sh

M&M Pizza Company Value Analysis Executive Summary

This study source was downloaded by 100000832890651 from CourseHero.com on 11-20-2021 16:10:13 GMT -06:00

https://www.coursehero.com/file/103903062/MM-Pizza-Executive-Summary-1docx/
 Moe Miller was recently appointed as managing director of M&M Pizza, a premium

pizza producer based out of Francostan. Miller is considering recapitalization by issuing

F$500MM in new company debt and then utilizing the proceeds to repurchase F$500MM in

company stock to maintain value for M&M owners. However, in order to make a well-informed

business decision, analysis of cost of equity, equity value, company value, stock price, and

weighted average cost of capital (WACC) must be implemented in two scenarios, without tax

and with tax. Such analysis shows that M&M Pizza should remain unlevered in a no tax

scenario, but become levered in a tax scenario.

m
er as
No Tax Scenario

co
eH w
As described by Modigliani and Miller, in a no tax scenario, a firm cannot change their

o.
overall value by changing their capital structure, or ratio of debt to equity. However, there are
rs e
ou urc
slight differences in the cost of equity, equity value, company value, and stock price. The WACC

value remains the same regardless of debt issuance. Likewise, the company value does not
o
aC s

change as there is no interest tax shield applicable. The cost of equity value for the unlevered
vi y re

scenario is 8%, compared to 9.88% for the levered scenario (see Appendix 1). Therefore, without

the issuance of debt, M&M Pizza shareholders require less compensation for the risk associated
ed d
ar stu

with investing capital in the company. As a result of this, the equity value is greater in the

unlevered situation. In addition, there is no advantage to the stock price of $25 per share in either
is

scenario as the reduction in shares as a result of the repurchase plan is offset by the additional
Th

cost of equity required for added risk. Therefore, based on a higher equity value and lower cost

of equity, Moe Miller would best serve the M&M owners by remaining debt-free.
sh

Tax Scenario

This study source was downloaded by 100000832890651 from CourseHero.com on 11-20-2021 16:10:13 GMT -06:00

https://www.coursehero.com/file/103903062/MM-Pizza-Executive-Summary-1docx/
 When taxes are implemented, we must account for the fact that interest paid on debt is

tax deductible. Therefore, a firm’s value is positively related to its debt up to an optimal level of

debt. This is depicted by comparing the cost of equity, equity value, company value, stock price,

and WACC of M&M Pizza when unlevered versus levered. Although the cost of equity value for

the levered scenario is higher, 9.88%, compared to the cost of equity for the unlevered scenario,

8%, the WACC is less when M&M Pizza does issue debt (see Appendix 1). This means that

M&M Pizza requires a lower rate of return for investors when debt is issued. As expected, the

equity value decreases when debt is issued since equity must be raised to cover the cost of debt.

m
er as
On the other hand, the company value is greater in the levered scenario due to the value added

co
eH w
from the tax shield related to the debt. Stock price also reflects this added value through the tax

o.
shield by increasing from $20 when unlevered to $34.11 when levered. To add to that, investors
rs e
ou urc
reap the benefits of higher earnings per share and dividends per share as a result of the stock

repurchase plan. Therefore, based on a higher company value, higher stock price and a lower
o
aC s

weighted average cost of capital, Moe Miller would best serve the M&M owners by issuing debt
vi y re

in a tax situation.
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000832890651 from CourseHero.com on 11-20-2021 16:10:13 GMT -06:00

https://www.coursehero.com/file/103903062/MM-Pizza-Executive-Summary-1docx/
 m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000832890651 from CourseHero.com on 11-20-2021 16:10:13 GMT -06:00

https://www.coursehero.com/file/103903062/MM-Pizza-Executive-Summary-1docx/
Powered by TCPDF (www.tcpdf.org)