Reference no: EM132707761

Joy Tours Ltd. and Fun Tours Ltd. Operate in the same geographical area and are close competitors. People often find their front offices to be similar and though both firms have an official line saying that they respect each other and that they are inspired by each other's business and décor styles, they are simply mirror images of each other and their financial records reflect the same as well in terms of an identical EBIT of $68,000. It is just that while Joy is fully financed by equity, Fun follows a D/E ratio of 1. Both firms have assets worth $650,000 each. The current market interest rate is 8% and both firms are enjoying a tax holiday because the government wishes to promote travel and tourism in the time to come to boost the tourism sector that has been hit hard by the pandemic. Both Joy and Fun follow a 100% dividend payout policy. You are a young graduate and want to invest some of your funds in the tourism sector because a well-wisher has told you that when an industry has hit rock bottom, up is the only way to go.

According to her, this is the correct time to invest in the tourism sector now to reap profits when the sector bounces back. With this view, you invest $48,750 in Joy Tours Ltd. Answer the questions that follow:

Problem a) What is your proportional ownership in Joy Tours Ltd.? What is the total cash inflow and rate of return on your investment in Joy Tours Ltd.?

Problem b) On your well-wisher's subsequent advice, you decide to switch your investment to Fun Tours Ltd. Demonstrate how will you be able to do that without changing your proportional ownership, total cash inflow and rate of return?