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DOUBT ABOUT CAPITAL STRUCTURE
Replies (3)
There are two firms P and Q which are identical except P does not use any debt in its capital
structure while Q has Rs. 8,00,000, 9% debentures in its capital structure. Both the firms have
earning before interest and tax of Rs. 2,60,000 p.a. and the capitalization rate is 10%.
Assuming the corporate tax of 30%, calculate the value of these firms according to MM
Hypothesis.
solution
Calculation of Value of Firms P and Q according to MM Hypothesis
Market Value of Firm P (Unlevered)
e
u
K
EBIT (1- t )
V
10 %
2,60,000 (1- 0.30 )
Rs.18,20,000
10 %
Rs.1,82,000
Market Value of Firm Q (Levered)
VE = Vu + DT
= Rs.18,20,000 + (8,00,000 × 0.30)
= Rs.18,20,000 + 2,40,000 = Rs. 20,60,000
this above problem appeared in nov2009 exam.m having doubt that
(1)mm hypothesis assumes that corporate taxes are ignored but still the institute has considered???
(2)why they have taken the value of unlevered firm while calculating value of levered firm??as they both are seperate firm
(3)is the solution correct becoz in ipcc module they have not given such method
please guys help me out m totally confused
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