Question

15. A firm requires total capital funds of Rs. 50 lacs and has two

options. All equity; and half equity and half 15% debt. The

equity shares can be currently issued at Rs. 100 per share. The

expected EBIT of the company is Rs. 5,00,000 with tax rate at

40% Find out the EPS under both the financial mix.

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Answer 1

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Therefore, the cost of capital for an otherwise identical all-equity firm is 16%. This is consistent with Modigliani-Miller's proposition that, in the absence of taxes, the cost of capital for an all-equity firm is equal to the weighted average cost of capital of an otherwise identical levered firm. shares.