(Related to Checkpoint 15.1) (Calculating capital structure
weights) Winchell Investment Advisors is evaluating the capital
structure of Ojai Foods. Ojai's balance sheet indicates that the
firm has $48.26 million in total liabilities. Ojai has only
$40.15 million in short- and long-term debt on its balance
sheet. However, because interest rates have fallen dramatically
since the debt was issued, Ojai's short- and long-term debt has
a current market price that is 10 percent over its book value or
$44.17...
CAPITAL STRUCTURE, PAYOUT POLICY AND COST OF CAPITAL
Pharma-C is a pharmaceutical firm that manufactures and sells a
portfolio of blockbuster drugs at high margins. The firm is
all-equity financed and has 40 million shares outstanding at a
price of $75 per share. Pharma-C’s current cost of capital is 7.5%.
The firm is considering to buy back $400 million in shares in the
open market and to finance the repurchase by issuing bonds.
Pharma-C plans to maintain this capital structure...
Modigliani and Miller (M&M) hypothesized that both dividend
policy and capital structure policy are irrelevant in determining
the value of a firm. Outline the arguments they used to reach their
positions, including the assumptions underlying those arguments.
With reference to relevant academic literature, discuss at least
one reason why the M&M hypotheses might not hold in practice
for BOTH dividend and capital structure policy.
Analyse the ANZ company's capital structure. How would you
describe the current capital structure for your company and justify
with reasons that should potential investors view this company as a
favourable investment choice?