Exercise-01:

EBIT 3,00,000
A) Value of the company  K   20,00,000 Here given,
0 .15
Ko = 15%, Kd = 10%
EBIT = 3,00,000
Debt Capital = 5,00,000
Capital Structure 1
EBIT 3,00,000
Less: Interest 10% (5,00,000×.10) 50,000
Net Income 2,50,000
EBIT 20,00,000
Value of equity capital,
K0
Less: Debt Capital 5,00,000
Equity Capital 15,00,000
Cost of Equity capital, 2,50,000
 16.67%
NI 15,00,000
ke 
equityCapital

EBIT 3,00,000
B) Value of the company  K   20,00,000 Here given,
0 .15
Ko = 15%, Kd = 10%
EBIT = 3,00,000
Debt Capital = 6,00,000 & 7,00,000
Capital Structure 1 Capital Structure 2
EBIT 3,00,000 EBIT 3,00,000
Less: Interest 10% 60,000 Less: Interest 10% 70,000
(6,00,000×.10) (7,00,000×.10)
Net Income 2,40,000 Net Income 2,30,000
Value of equity capital, 20,00,000 Value of equity capital, 20,00,000
EBIT EBIT
K0 K0
Less: Debt Capital 6,00,000 Less: Debt Capital 7,00,000
Equity Capital 14,00,000 Equity Capital 13,00,000
Cost of Equity capital, 2,40,000
 17.14%
Cost of Equity capital, 2,30,000
 17.92%
NI 14,00,000 NI 13,00,000
ke  ke 
equityCapital equityCapital
 EBIT 3,00,000
C) Value of the company  K   17,64,705 Here given,
0 .17
Ko = 17%, Kd = 10%
EBIT = 3,00,000
Debt Capital = 5,00,000
Capital Structure 1
EBIT 3,00,000
Less: Interest 10% (5,00,000×.10) 50,000
Net Income 2,50,000
EBIT 17,64,705
Value of equity capital,
K0
Less: Debt Capital 5,00,000
Equity Capital 12,64,705
Cost of Equity capital, 2,50,000
 19.76%
NI 12,64,705
ke 
equityCapital

Exercise-02:
A) Total Value = Equity + Debt capital Here given,
= 8,00,000 + 30,00,000 EBIT = 8,00,000
= 38,00,000 Ke = 12%, Kd = 8%, I = 8%
Debt capital = 30,00,000
Capital Structure 1
EBIT 8,00,000
Less: Interest 10% 2,40,000
(30,00,000×.08)
Net Income 5,60,000
NI 5,60,000
Value of equity capital, K  46,66,666
0 .12
Debt Capital 30,00,000
Value of the Company 76,66,666

Overall Capitalization (KO)

Euity 46,66,666
Ko = We.Ke + Wd.Kd We    100  61% , Wd = 39%
totalCapital 76,66,666
= (61 × .12) + (39 × .08) = 10.44%
B) Here given,
EBIT = 10,00,000
Ke = 12%, Kd = 8%, I = 8%
Debt capital = 40,00,000
Debenture = 10,00,000
Capital Structure 1
EBIT 10,00,000
Less: Interest (24,00,000×.08 + 3,30,000
10,00,000 ×.09)
Net Income 6,70,000
NI 6,70,000
Value of equity capital, K  55,83,334
e .12
Debt Capital 40,00,000
Value of the Company 95,83,334

Overall Capitalization (KO)

Euity 55,83,334
Ko = We.Ke + Wd.Kd We    100  58% , Wd = 42%
totalCapital 95,83,334
 30,00,000  10,00,000 
= .58  .12    .08    .09
 95,83,334   95,83,334 
= .0696 + .025 + .00939 = 10.40%

Exercise-03:
Here given,
EBIT = 1,50,00,000
Ke = 14%, Kd = 8%

Exercise-04:
Under Traditional Approach
Calculation of total value (VT), Overall Cost of Capital(Ko)
 Company A B
Debt Capital 500000 1000000
Net Operating Income 500000 500000
Less: Interest 10% 50000 100000
Net Income 450000 400000
Share Capital 3461538 2857143
Total Capital 3961538 SSSS3857143
Overall cost 12.62% 12.96%
Under Traditional Approach
Calculation of total value (VT),
Company A B
Net Operating Income 5,00,000 10,00,000
Overall cost of capital (Ko) 0.125 0.125
Total Value 40,00,000 40,00,000
Exercise-05:
Here given, Net Operating Income/EBIT: 1,50,00,0000
Cost of Equity Cost of Debt
Amount of Debt Capital capital
2,00,00,000 12% 7.5%
3,00,00,000 12.5% 8%
5,00,00,000 13% 9%
6,00,00,000 14% 10%
8,00,00,000 15% 12%

Capital 1 2 3 4 5
Structure
EBIT 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000
Less: Interest on
debt capital 15,00,000 24,00,000 45,00,000 60,00,000 96,00,000
Net Income 1,35,00,000 1,26,00,000 1,05,00,000 90,00,000 54,00,000
Value of equity 1,35,00,000 1,26,00,000 1,05,00,000 90,00,000 54,00,000
NI .12 .125 .13 .14 .15
capital,
Ke  11,25,00,000 9,00,00,000
 8,07,69,231
 6,42,85,714
 3,60,00,000

Debt Capital 2,00,00,000 3,00,00,000 5,00,00,000 6,00,00,000 8,00,00,000

Value of the firm 13,25,00,000 10,08,00,000 13,07,69,231 12,42,85,714 11,60,00,000
Overall Cost, 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000
EBIT 13,25,00,000 10,08,00,00013,07,69,231
12,42,85,71411,60,00,000
Ko 
Value .ofa. firm 11 .32%  14.88%  11 .47%  12.07%  12.93%
DFL 15.09% 29.76% 38.24% 48.28% 68.97%

Exercise-06:

Exercise: 7
A)
Capital Structure A
EBIT 20,00,000
Less: Interest on debt
capital 4,80,000
Net Income 15,20,000
Value of Equity, 20,00,000
EBIT .125

 Ko   1,60,00,000

Less: Debt Capital 60,00,000

Equity Capital 1,00,00,000
Cost of equity capital, Ke 15,20,000
NI 1,00,00,000
equitycapital  .152

B)
Capital 1 2 3 4 5
Structure
EBIT 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000
Less: Interest
on debt capital 7,20,000 4,00,000 5,60,000 6,40,000 8,00,000
Net Income 12,80,000 16,00,000 1,40,000 13,60,000 12,00,000
Value of 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000
Equity, .125 .125 .125 .125 .125
EBIT  1,60,00,000
 1,60,00,000  1,60,00,000  1,60,00,000
 1,60,00,000

 Ko 
Less: Debt 90,00,000 50,00,000 70,00,000 80,00,000 1,00,00,000
Capital
Equity Capital 70,00,000 1,10,00,000 90,00,000 80,00,000 60,00,000
Cost of equity 12,80,000 16,00,000 1,40,000 13,60,000 12,00,000
capital, Ke 90,00,000 50,00,000 70,00,000 80,00,000 1,00,00,000
NI  .1829  .1455  .16  .17  .20
equitycapital
DFL 56.25% 31.25% 43.75% 50% 62.50%

Exercise: 8
A)
Capital Structure A B
 EBIT 40,00,000 40,00,000
Less: Interest on debt capital
12% 9,60,000 18,00,000
Net Income 30,40,000 22,00,000
NI 30,40,000 22,00,000
Value of equity capital,
Ke .14 .15
 2,17,14,286  1,46,66,667

Debt Capital 80,00,000 1,50,00,000

Value of the firm 2,97,14,286 2,96,66,667
Overall Cost, 40,00,000 40,00,000
EBIT 2,97,14,286 2,96,66,667
Ko 
Value .ofa. firm  13.46%  13.48%

B) Arbitrage Process:
Particular’s Taka
The shareholders current position in company A:
Dividend income (30,40,000 ×2%) 60,800
Investment (2,97,14,286 ×2%) 5,94,286
The shareholders position by borrowing 2%:
Dividend income (30,40,000 ×2%) 60,800
Interest revenue on debt capital (80,00,000 ×2% ×12%) 19,200
Total Earnings (A) 80,000
Less: Dividend income (30,40,000 ×2%) 60,800
Interest revenue on debt capital (150,00,000 ×2% ×12%) 36,000
Total Earnings (B) 96,800
Through the arbitrage he will reduce his outlay by (B-A) 16,800

C) According to Miller & Modigliani this arbitrage process will cease (stop) when the values of
both the firms are identical.
Exercise: 9
Calculation of EPS
Method A Method B Method C
EBIT 25,00,000 25,00,000 25,00,000
Less: Interest - 10,00,000 15,00,000
EBT 25,00,000 15,00,000 10,00,000
Less:Tax40% 10,00,000 6,00,000 4,00,000
EAT(Before Dividend) 15,00,000 9,00,000 6,00,000
Less: Dividend - - -
EAT (After Dividend) 1500000 900000 600000
No. of Shares 200000 100000 50000
EPS 7.5 9.0 12
Comment: Since C has highest EPS the shareholders should accept Method C for there Highest
benefit on EPS.
Exercise: 10

Capital A B
Structure
EBIT 50,00,000 50,00,000
Less: Interest on
debt capital 10% - 2,00,000
Net Income 50,00,000 48,00,000
Value of equity 50,00,000 48,00,000
NI .13 .15
capital,
Ke  3,84,61,538  3,20,00,000

Debt Capital - 20,00,000

Value of the firm 3,84,61,538 3,40,00,000
Overall Cost, 50,00,000 48,00,000
EBIT 3,84,61,538 3,20,00,000
Ko 
Value .ofa. firm 13%  14.7%
DFL 0% 5.88%