EDF Ltd is an Australian company,however its shareholders cannot utilise franking credit that they receive with dividends from the company.The company consistently generates EBIT of $3 million and pays income tax at the rate of 30%. It is currently all-equity financed with a cost of equity at 15% and its management is considering issuing $6,000,000 of bonds at an interest rate of 10% to repurchase some of the issued shares.
Required;
1- What is the value of the company with an all-equity capital structure?
2- What is the value of the company if it borrows the money and uses the proceeds to repurchase shares?
3- Distinguish between financial structure and capital structure.
4- How do agency costs and free cash flow relate to capital-structure policy?
5- Discuss the assumptions of irrelevance hypothesis of capital structure