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