A Ltd and B Ltd are identical in every respect except capital structure.A Ltd doesnot employ debt in its capital structure Whereas B Ltd employs 12% Debenture amounting to Rs 10,00,000.
(1)All assumption of MM model are met.
(2)Income tax rate is 30%
(3)EBIT is Rs 2,50,000
(4)Equity capitalisation rate of A Ltd is 20%
Calculate the value of Both company.
Please can anyone from forum can give me it solution.
@ vikas ji.....What about tax benefit on interest ?
Thanks Vikas,Actually it is solved as follow
Mkt value of B Ltd =Value of unlevered firm + tax sheild
ie =8,75,000 + 10,00,000 * (0.30) = 11,75,000
Query Why tax sheild is added to it?
According to MM aproach cost of capital (ko) remains same irrespective of debt fund is used then how Mkt value of levered firm is increased by tax sheild.??
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