The company's current capital structure consists of equity capital of Rs. 30 lakhs(Face value is Rs.

10 each) and reserves and su

lakhs.For the new product line company is contemplating a following capital structures to raise Rs.15 lakhs.

A B
Equity 20% 80%
Debentures(Face Value Rs.100 each) 80% 20%

interest rate of 15% under Plan A and 10% under Plan B.The debentures under both the plans will be issued at par and redeem
premium of 20% for 5 years.The market price is to be considered Rs.15 for both plans and debentures are unlisted. The unleve
the company is 1.23 , the risk-free rate is 5% and the applicable market return is 10%. Tax rate applicable is 30%. Calculate Wa
market value weights.
 .10 each) and reserves and surplus of 20 lakhs and 10% bank loan of Rs.10
Rs.15 lakhs.

ill be issued at par and redeemed at a

ntures are unlisted. The unlevered Beta of
pplicable is 30%. Calculate Wacc using
A company has following capital structure

Sources of finance Book value

Equity capital(Rs. 10 fully paid up) 25

11% Preference Cap(Rs.100 fully paid up) 5
Retained earnings 20
13.5% Debentures(Rs.100 each) 15
15% Term loans 15

The expected dividend on equity shares is 4.60 and the expected growth rate is 7%. Market price of the share is RS.40.Prefere
selling at Rs.75 per share.Debentures redeemable after 6 years are currently selling at Rs.80 per debenture.Tax rate is 40%. Es
value weights
 he share is RS.40.Preference stock redeemable after 10 years is currently
enture.Tax rate is 40%. Estimate the WACC using book value and market
 Bul =1.20 Tax
Market Market
Debt/Value Equity/Value B-T Cost of Post tax Debt
Ratio (wd) Ratio (wce) Debt (rd)
0.00 1.00 0.07
0.20 0.80 0.08
0.40 0.60 0.10
0.60 0.40 0.12
0.80 0.20 0.15
 30% rf 5% Mkt pre 6%

B lev
 Firm U Firm L
EBIT 150000 150000
I 0 60000
Equity Earnings 150000 90000
Cost of Equity 0.15 0.16
Market value of Equity 1000000 562500
Cost of debt - 0.12
Market value of Debt 0 500000
Market Value of the firm 1000000 1062500
Average cost of capital 0.15 0.141176

A person has 10% of ownership in Firm L .Show that MM thoery of irrelevance of capital structure holds true for the above cas
olds true for the above case using arbitrage opportunity by the investor.