1. TSAKALOTOS plc, a Greek company, has 30 million shares
outstanding with a price of €20 per share. In addition,
TSAKALOTOS has issued bonds with a total current market
value of €100 million. Suppose TSAKALOTOS’s equity cost
of capital is 10%, and its debt cost of capital is 5%.
(a) What is TSAKALOTOS’s pre-tax weighted average cost
of capital? [15 marks]
(b) If TSAKALOTOS’s corporate tax rate is 30%, what is its
after-tax weighted average cost of capital? [15 marks]
(c) State briefly the Modigliani and Miller’s capital structure
theory (Propositions I and II).
(d) Discuss the impact of corporate and personal tax rates on
Modigliani and Miller’s capital structure theory.