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Question 8.6: Two businesses, Delta plc and Omega plc, are identical excep...

Two businesses, Delta plc and Omega plc, are identical except for the fact that Delta plc is financed entirely by ordinary shares and Omega plc is 50 per cent financed by loans. The profit before interest for each business for the year is £2 million. The ordinary shareholders of Delta plc require a return of 12 per cent and the ordinary shareholders of Omega plc require a return of 14 per cent. Omega plc pays 10 per cent interest per year on the £10 million loans outstanding. (Tax is ignored for reasons that we shall discuss later.)

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Delta plc Omega plc
£m £m
Profits before interest 2.0 2.0
Interest payable \underline{ـــ                 } \underline{(1.0)}
Available to ordinary shareholders \underline{2.0} \underline{1.0}

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