📢 Too many exams? Don’t know which one suits you best? Book Your Free Expert 👉 call Now!
  • google app store apple app store
    • ✖

      Question

      Two firms, Firm A and Firm B, are identical in all

      respects except their capital structure. • Firm A (Unlevered): It is entirely equity financed with equity capital of ₹10,00,000. • Firm B (Levered): It has equity capital of ₹5,00,000 and debt capital of ₹5,00,000, carrying an interest rate of 10% per annum. • The expected EBIT of both firms is ₹2,00,000. • Assume there are no corporate taxes and capital markets are perfect. You are required to calculate the value of both firms under the Modigliani and Miller (MM) Approach (No Taxes) and briefly state the principle underlying your result.
      A Both firms Rs. 10,00,000 Correct Answer Incorrect Answer
      B Both firms Rs. 20,00,000 Correct Answer Incorrect Answer
      C Firm A higher value than Firm B Correct Answer Incorrect Answer
      D Firm B higher value than Firm A Correct Answer Incorrect Answer
      E Not determinable Correct Answer Incorrect Answer

      Solution

      MM without taxes says value independent of capital structure. Value = EBIT/Ke. Same for both firms.

      Practice Next
      More Financial Statement Analysis Questions
      ask-question