Chapter Fifteen: Capital Structure: Basic Concepts Case Study: ACB Group

Corporate Finance: European EditionChapter Fifteen: Capital Structure: Basic ConceptsCase Study: ACB GroupACB Group is a global power and automation technologies firm that is listed on the StockholmStock Exchange. You have been hired to assist the new management in evaluating two fundingoptions for a major expansion project that will cost €1.5 billion. The company is consideringwhether to issue 100% equity, 100% debt with a 5% coupon or 50/50 debt/equity. Assume notaxes.You have been given the following data:Expected Earnings next year: €3 billionDividends: No dividends are paid by the companyNumber of Shares Outstanding: 10 billion.Cost of Equity: 10%Net Cash Flow from Major Expansion Project: A permanent €0.3 billion per annumQ1. What is the net present value of the project to ACB Group’s shareholders?Q2. Show the market value balance sheet of ACB Group upon completion of each of the threefunding scenarios.Q3. What is the expected return on equity for each scenario?Q4. What is the share price of the firm under each scenario?Q5. Are your results consistent with Modigliani and Miller’s Proposition I and II? Explain.