Scribd Logo
Upload

Welcome to Scribd!

  • FM - Test 2 - L41 POSTED

    Uploaded by

    Jun Rui Chng
    28 views1 page
    Lion plc is a newly established IT company with few capital assets but commits significant spending to research and development. Currently operating at a loss, profit forecasts indicate it will become profitable in 3 years and then grow rapidly at 20% for 5 years before moderate 5% annual growth. It has a 10% cost of capital and is 100% equity financed. The document provides questions on Modigliani-Miller's first proposition, effect of taxes on the proposition, impact of bankruptcy costs on capital structure theory, and recommends Lion plc's capital structure policy for the next 3, 8, and 20 years based on appropriate financial theory.

    Original Description:

    Original Title

    FM_Test 2_L41 POSTED

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Lion plc is a newly established IT company with few capital assets but commits significant spending to research and development. Currently operating at a loss, profit forecasts indicate it will become profitable in 3 years and then grow rapidly at 20% for 5 years before moderate 5% annual growth. It has a 10% cost of capital and is 100% equity financed. The document provides questions on Modigliani-Miller's first proposition, effect of taxes on the proposition, impact of bankruptcy costs on capital structure theory, and recommends Lion plc's capital structure policy for the next 3, 8, and 20 years based on appropriate financial theory.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    28 views1 page

    FM - Test 2 - L41 POSTED

    Uploaded by

    Jun Rui Chng
    Lion plc is a newly established IT company with few capital assets but commits significant spending to research and development. Currently operating at a loss, profit forecasts indicate it will become profitable in 3 years and then grow rapidly at 20% for 5 years before moderate 5% annual growth. It has a 10% cost of capital and is 100% equity financed. The document provides questions on Modigliani-Miller's first proposition, effect of taxes on the proposition, impact of bankruptcy costs on capital structure theory, and recommends Lion plc's capital structure policy for the next 3, 8, and 20 years based on appropriate financial theory.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 1

    UOL: Financial Management Group L41

    LECTURER: CHONG CHIN SIONG

    Class Test 2

    Lion plc is a **** newly set up IT company. It has very few capital assets. However, the
    directors are committed to spending a significant amount in research and development
    activities every year.

    Currently the company is operating at a loss. The profit forecast indicates that it will
    become profitable in three years’ time. Profit will rise rapidly at a rate of 20% thereafter
    for a period of no more than **** 5 years. It is then expected to have a more moderate
    growth of 5% per annum. The company has a cost of capital of £10% and it is 100%
    equity financed.

    REQUIRED

    (a) Explain clearly **** Modigliani and Miller’s first proposition in a world with no
    taxes or frictions.

    What adjustments must be made to the proposition if corporate taxes exist?

    (b) Explain clearly the **** effect of bankruptcy costs on the capital structure theory.

    (c) Advise the management of Lion plc what capital structure policy it should adopt for
    the next 3, 8 and 20 years. **** Your advice must include the explanation of the
    appropriate financial theory **** on capital structure.

    End

    FM TEST 2 BY CHONG CHIN SIONG 1

    You might also like