How do the financial statements for M&M Pizza vary with the proposed repurchase plan
What is going on at M&M Pizza?
Moe Miller, the new managing director at M&M Pizza, is considering substituting Debt for Equity capital in order to reduce the cost of capital. The proposal is to issue F$500 million in new debt at @4% and to use the proceeds to repurchase F$500 million in company shares. As per Miller, the cost of debt is 4% and cost of equity is 8%, hence the substitution is justified. Moreover, the recapitalization will create sustained value for M&M owners as the plan would have no impact on assets, profits and operations of business.
The other proposal would be unleveraged capital structure with tax as the government is considering altering the tax policy by introducing a 20% corporate income tax.
How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends per share?
Proposed Financial Statements for M&M Pizza:
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