В. identical in every respect except that company Y is levered, while X is unlevered. The outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The other information for the two companies is as follows: Particulars Two companies X and Y belong to the equivalent risk group. The two companies are Y 1,50,000 60,000 90,000 1,50,000 Net operating income -Interest Earnings to Equity Share Holders 1,50,000 Equity capitalization rate Market value of equity Market value of debt Total value of the firm, V Overall capitalization rate (Ko EBIT/V) Debt-Equity Ratio 0.20 4,50,000 6,00,000 10,50,000 14.3% 1.33 0.15 10,00,000 10,00,000 15% An investor owns 5% equity shares of company Y. Show the process and the amount by which he could reduce his outlay through use of the arbitrage process. Is there any limit to the process?
В. identical in every respect except that company Y is levered, while X is unlevered. The outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The other information for the two companies is as follows: Particulars Two companies X and Y belong to the equivalent risk group. The two companies are Y 1,50,000 60,000 90,000 1,50,000 Net operating income -Interest Earnings to Equity Share Holders 1,50,000 Equity capitalization rate Market value of equity Market value of debt Total value of the firm, V Overall capitalization rate (Ko EBIT/V) Debt-Equity Ratio 0.20 4,50,000 6,00,000 10,50,000 14.3% 1.33 0.15 10,00,000 10,00,000 15% An investor owns 5% equity shares of company Y. Show the process and the amount by which he could reduce his outlay through use of the arbitrage process. Is there any limit to the process?
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 X and Y belong to the equivalent risk group. The two companies are
identical in every respect except that company Y is levered, while X is unlevered. The
outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The
other information for the two companies is as follows:
Particulars
Net operating income
-Interest
Earnings to Equity Share Holders
Y
1,50,000
60,000
90,000
1,50,000
1,50,000
Equity capitalization rate
Market value of equity
Market value of debt
Total value of the firm, V
Overall capitalization rate (Ko = EBITV)
Debt-Equity Ratio
0.20
4,50,000
6,00,000
10,50,000
14.3%
1.33
0.15
10,00,000
10,00,000
15%
An investor owns 5% equity shares of company Y. Show the process and the amount by which
he could reduce his outlay through use of the arbitrage process. Is there any limit to the
process?
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