1.

Companies U and L are identical in every respect except that the former does
not use debt in its capital structure, while the latter employs ₹6,00,000 of 15%
debt. Assuming that
(a) all the MM Assumption are met,
(b) the corporate tax rate is 50%,
(c) the EBIT is ₹2,00,000, and
(d) the equity capitalization of the unlevered company is 20%, what will be the
value of the firms, U and L? also determine the weighted average cost of capital
both the firms.
Solution:
Under MM Model, the value of a firm may be found as follows:
Value of Unlevered firm, :

Value of levered firm,

EBIT ₹2,00,000
-Interest 90,000
Profit before Tax 1,10,000
-Taxes 55,000
PAT 55,000
Total Market Value, V 8,00,000
-Market Value of Debt 6,00,000
Market value of Equity, E 2,00,000

=.20+(.20-.15) (1-0.5)(6/8)
=27.5%

=12.5%
 2.Companies U and L are identical in every respect, except that U is
unlevered while L is levered. Company L has ₹ 20,00,000 of 8%
Debentures outstanding Assume (1) that all the MM assumptions are
met. (2) that the tax rate is 50%, (3) that EBIT is 6,00,000 and that
equity capitalisation rate for company U is 10%
(a) What would be the value for each firm according to MM's approach?
(b) Suppose =₹25,00,000 and =₹ 45,00,000. According to MM, do
they represent equilibrium values? If not, explain the process by which
equilibrium will be restored.
3. ABC Ltd. is an unlevered firm having total assets of ₹ 50,00,000
(all represented by share capital of₹ 50,00,000) and equity
capitalization rate, (which is also, , for the unlevered firm) of 10%. It
has an EBIT of ₹ 10,00,000 subject to corporate tax @40%.
There is another firm XYZ Ltd. also having total assets of ₹50,00,000
and alike in all respects to ABC Ltd. except that XYZ Ltd. has issued
5% debt of ₹20,00,000. The value of the firm ABC Ltd. is: