Case 30: M&M Pizza1.What is going on at M&M Pizza?How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends...

Answer 1: M&M Pizza recently appointed a new managing director and the new managing director while looking at the company’s financials don't hat that the financial policy at the company is overly conservative therefore, he decided to introduce debt in the company as he felt that at the current borrowing rate of 4% the company can make good use of the debt and purchase the equity to create shareholder value (Harris & Raviv 1991).
The financial statements for M&M Pizza will not vary much other than with the proposed repurchase plan, the only things which will change are:
· Book Debt: The book debt of the company will increase by F$500 million
· Book Equity: The book equity of the company will decrease by F$500 million
· Cash: There will be not affect on cash as the cash the company will be getting from the issuance of the debt will be used to repurchase the shares
Yes, the alternative policies will improve the expected dividends per share as with the repurchase the number of shares outstanding will reduce while the dividend will remain the same and therefore there will be an increase in the dividend per share that is being paid out.
Answer 2: The company’s current WACC with no debt which is the current state of the company is 8% which is also the cost of equity for the company. This 8% WACC has been calculated based on a market risk premium of 5% with a beta of 0.8 and a risk-free rate of 4% (Rauh & Sufi 2010).
The company is willing to pay 8% on equity because issuing equity does not bring any obligation to the company which they must pay each year, but with the debt there comes an obligation of the payment of interest every year. Therefore the 4% debt that will fetch F$500 million to the company will also cost approximately F$20 million which will reduce the overall net income of the company which could otherwise be higher when there was no debt with the company.
Answer 3:
The impact the repurchase plan has on M&M’s weighted average cost of capital is that there is no impact on the WACC, as the WACC remains the same because of no tax impact on the debt or the levered beta....