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 (M

  • M Approach (No Taxes) and briefly state the principle underlying your result.
A Both firms Rs. 10,00,000
B Both firms Rs. 20,00,000
C Firm A higher value than Firm B
D Firm B higher value than Firm A
E Not determinable
Practice Next

Hey! Ask a query