a. Big Bee Ltd has a cost of equity of 10%.Currently; it has 250,000 ordinary shares which are quoted at the stock Exchange at KES 120 per share. The company’s earnings per share are KES10 and it intends to maintain a dividend payout ratio of 50% at the end of the current financial year. The expected net operating income for the current year is KES 3 million and the available investment proposals are estimated to cost KES 6 million.
i. Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm. (8marks)
ii. What are the assumptions inherent in MM model? (2 marks
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