Mega plc is a global oil exploration company and operates in several different countries . The company has never borrowed before but feels that in order to maximize growth and increase value, a debt issue is required. Currently the firm has 6 0 million shares outstanding with a share price of £ 2 . The profit before taxes is forecast to be £ 30 mi llion . The firm requires £ 4 0 million to fund its expansion plans. The firm feels that it could borrow £ 50 million and use the additional £1 0 million to also buy back shares in the company. The corporate tax rate is 2 5 % .
a) Determine the expected earnings per share for the company before and after the debt issue.
b) Determine the value of Mega plc after restructuring and the value of its equity using the Modigliani – Miller model with corporate taxes.
c) Using your answer for question (a) , discuss the use of earnings per share as a basis for financial decision taking.