Two companies are identical in all respects except that X Ltd., has debt of Rs 5,00,000 borrowed at the rate of 12% whereas Y Ltd., has no debt in its capital structure. The total assets of both the companies amount to Rs 15,00,000 on which the companies have earnings of 20%. You are required to do the following: (i) Calculate value of companies and k0 using NI approach taking ke as 18%. (ii) Calculate value of companies and ke using NOI approach taking k0 as 18%. (iii) Compare the results and comment on the difference of the two approaches.
Two companies are identical in all respects except that X Ltd., has debt of Rs 5,00,000 borrowed at the rate of 12% whereas Y Ltd., has no debt in its capital structure. The total assets of both the companies amount to Rs 15,00,000 on which the companies have earnings of 20%. You are required to do the following: (i) Calculate value of companies and k0 using NI approach taking ke as 18%. (ii) Calculate value of companies and ke using NOI approach taking k0 as 18%. (iii) Compare the results and comment on the difference of the two approaches.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Two companies are identical in all respects except that X Ltd., has debt of Rs 5,00,000 borrowed at the rate of 12% whereas Y Ltd., has no debt in its capital structure. The total assets of both the companies amount to Rs 15,00,000 on which the companies have earnings of 20%. You are required to do the following:
(i) Calculate value of companies and k0 using NI approach taking ke as 18%.
(ii) Calculate value of companies and ke using NOI approach taking k0 as 18%.
(iii) Compare the results and comment on the difference of the two approaches.
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