0. Company – U and company – L are similar in all respects, except U is unlevered and L is having 10% debt of 10,00,000. Assume EBIT level of 3,60,000, tax rate of 30%, cost of all equity company at 18%. If all the assumption of MM hypothesis are satisfied, what is the value of company U and company – L. Does these values indicate the equilibrium, otherwise explain the process through which such equilibrium is achieved
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
10. Company – U and company – L are similar in all respects,
except U is unlevered and L is having 10% debt of 10,00,000.
Assume EBIT level of 3,60,000, tax rate of 30%,
company at 18%. If all the assumption of MM hypothesis are
satisfied, what is the value of company U and company – L. Does
these values indicate the equilibrium, otherwise explain the
process through which such equilibrium is achieved
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