Q.

1)

Companies X and Y are identical in all respects including

risk factors except for debt/equity. Company X having

issued 10% debentures of Rs. 18 lakhs while company Y has issued only equity. Both the companies earn 20%

before interest and taxes on their total assets of Rs. 30

lakhs. Assuming a tax rate of 50% and capitalisation rate of 15% for an all-equity company compute the value of companies X and Y.

PARTICULARS

Company X

Company Y

Capitalisation of earning @ 15% Less Value of Debt Value of Equity Add Value of Debt Total Value of Company

20, 00,000 9, 00,000 11, 00,000 18, 00,000 29, 00,000

20, 00,000

20, 00,000 0 20, 00,000

Q.2) Companies X and Y are in the same risk class and identical
in all respects except that company X uses debt while
company Y does not leveraged. Co. X has 9 lakh debentures carrying 10% rate of interest. Both companies earn 20% before interest and taxes on their total assets of Rs. 15 lakhs. Assume perfect capital markets, tax rate of 50% and capitalization rate of 15% for an all equity Co. Compute the value of companies X and Y.

Company X
Equity share capital 10% Debentures Total Assets EBIT (20% on total assets) Tax Rate

Rs.
6,00,000 9,00,000 15,00,000 3,00,000 50%

Company Y
Equity share capital Total Assets

Rs.
15,00,000 15,00,000

EBIT (20% on total assets)

Tax Rate

3,00,000
50%

Value of both the company under Net Income Operating Approach

Company X
Value of Equity = EBIT(1-T)/Ke = 3,00,000(1-0.5)/0.15 = 1000000 Rs. Value of Debt = 9,00,000*0.50 = 4,50,000 Value of Firm = 10,00,000 + 4,50,000 = 14,50,000

Company Y
Value of Equity = EBIT(1-T)/Ke = 3,00,000(1-0.5)/0.15 = 10,00,00Rs. Value of Firm = Value of Equity = 10,00,000 Rs.