Competing theories relating to capital gearing and dividend policy

This is a paper that focuses on the competing theories relating to capital gearing and dividend policy. The paper also requires you to analyze the capital structure of XYZ and recommendations.

Competing theories relating to capital gearing and dividend policy

Learning Outcome
·         Firstly, calculate, as demonstrated in lectures and seminars, and interpret investment ratios and other performance measures to facilitate the valuation of shares/businesses in the context of mergers and acquisitions
·         Secondly, evaluate competing theories relating to capital gearing and dividend policy and also their impact on the development of corporate policies

Assessment Brief:

You are a corporate finance analyst at a newly established investment bank, which has been approached by three different companies for advice. You need to write an answer for each company below as instructed per each case:

Company 1: (20% of the mark)

XYZ has 30 million shares outstanding, selling at $25 per share and a debt-equity ratio (in market value terms) of 0.25. The beta of the stock is 1.15, and the firm currently has a AA rating, with a corresponding market interest rate of 10%. The firm’s income statement is as follows:

EBIT $150 million
Interest Exp. $ 20 million
Taxable Inc. $130 million
Taxes $ 52 million
Net Income $ 78 million

The current risk-free rate is 8% and also the market risk premium is 5.5%.
Additional information:
–          The firm is proposing borrowing an additional $200 million in debt and repurchasing stock. If it does so its rating will decline to A, with a market interest rate of 11%.
–          The firm has another option to raise its debt/equity ratio (instead of borrowing money and repurchasing stock). It has considerable capital expenditures planned for the next year ($150 million). The company also pays $1 in dividends per share currently (Current Stock Price=$20).

You have been asked to analyze the capital structure of XYZ and also make recommendations on the roadmap and the way to go. Please make sure that your answer does not exceed 500 words.

Additionally, there are other questions that are in the below attachment that are relating to the above question.

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