Capital Structure Theories: Modigliani-Miller Propositions

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Assessment 1 - Assignment
Unit: FIN201 – Corporate Finance

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Question 1:
Part 1:
Formula of simple interest: Principal*Time period * Interest rate (Brigham, F., and Michael C.
2013)
Funds deposited in each year
Year Amount Time
Year 1
$
100.00
At the starting of the
year
Year 2
$
200.00
At the starting of the
year
Year 3
$
300.00
At the starting of the
year
Year 4
$
-
Year 5
$
-
Interest Rate for each
period 7.00% simple interest rate
Note: Note: It has been assumed that all funds have been deposited each year and at the starting
of the year. It is also assumed that interest gathered in each year is not available for reinvestment
in subsequent years.
Value of funds deposited after three years using Simple interest
Principa
l
Period of investment in
years
Interest
Earned
Initial
Amount
Future
Value
$
100.00 3
$
21.00
$
100.00
$
121.00
$
200.00 2
$
28.00
$
200.00
$
228.00
$
300.00 1
$
21.00
$
300.00
$
321.00
$
70.00
$
600.00
$
670.00
Value of funds deposited after three years using Simple interest
Principa
l
Period of investment in
years
Interest
Earned Initial Amount
Future
Value
$
100.00 5
$
35.00
$
100.00
$
135.00

3
$
200.00 4
$
56.00
$
200.00
$
256.00
$
300.00 3
$
63.00
$
300.00
$
363.00
$
154.00
$
600.00
$
754.00
Part 2:
Value of funds deposited after three years using Simple interest
Principal Period of investment in years
$ 100.00 5
$ 200.00 4
$ 300.00 3
Where:
 C refers to the periodic payment in form of coupon payments
 F refers to par value or face value of bond
 r: Yield to maturity (YTM)
 n = periods till the maturity of bond (Brigham, F., and Michael C. 2013)
Part 2 Bond Face Value $ 100.00
Coupon Rate 14%
Coupon paid Semi-Annually
Yield to Maturity 16%
Each Coupon Payment $ 7.00
Number of coupon payments 20
Yield to Maturity for each coupon period 8%
Bond Face Value $ 100.00
Part 3: