Question

Q.4 The two companies, U and L, belong to an equivalent risk class. These two firms are identical in every respect except that U Company is unlevered while Company L has 10 percent debentures of Rs 30 lakh. The other relevant information regarding their valuation and capitalization rates are as follows: Particulars Firm U Firm L Net operation income (EBIT) Rs 7,50,000 Rs 7,50,000 Interest on debt (I) -- 3,00,000 Earnings to equity holders (NI) 7,50,000 4,50,000 Equity-capitalisation rate (ke) 0.15 0.20 Market value of equity (S) 50,00,000 22,50,000 Market value of debt (B) -- 30,00,000 Total value of firm (S + B) = V. 50,00,000 52,50,000 Debt-equity ratio (B/S) 0 1.33 a) Calculate the overall capitalisation rate (Ko) for both unlevered and levered firm (b) Why do you feel the levered firm has higher total value?

          Q.4 The two companies, U and L, belong to an equivalent risk class. These two firms are
identical in every respect except that U Company is unlevered while Company L has 10 percent
debentures of Rs 30 lakh. The other relevant information regarding their valuation and
capitalization rates are as follows:
Particulars
Firm U
Firm L
Net operation income (EBIT)
Rs 7,50,000
Rs 7,50,000
Interest on debt (I)
--
3,00,000
Earnings to equity holders (NI)
7,50,000
4,50,000
Equity-capitalisation rate (ke)
0.15
0.20
Market value of equity (S)
50,00,000
22,50,000
Market value of debt (B)
--
30,00,000
Total value of firm (S + B) = V.
50,00,000
52,50,000
Debt-equity ratio (B/S)
0
1.33
a) Calculate the overall capitalisation rate (Ko) for both unlevered and levered firm
(b) Why do you feel the levered firm has higher total value?

Q.4 The two companies, U and L, belong to an equivalent risk class. These two firms are
identical in every respect except that U Company is unlevered while Company L has 10 percent
debentures of Rs 30 lakh. The other relevant information regarding their valuation and
capitalization rates are as follows:
Particulars
Firm U
Firm L
Net operation income (EBIT)
Rs 7,50,000
Rs 7,50,000
Interest on debt (I)
–
3,00,000
Earnings to equity holders (NI)
7,50,000
4,50,000
Equity-capitalisation rate (ke)
0.15
0.20
Market value of equity (S)
50,00,000
22,50,000
Market value of debt (B)
–
30,00,000
Total value of firm (S + B) = V.
50,00,000
52,50,000
Debt-equity ratio (B/S)
0
1.33
a) Calculate the overall capitalisation rate (Ko) for both unlevered and levered firm
(b) Why do you feel the levered firm has higher total value?

Added by Francisco Jose B.

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