Question

all successful firm have equity as the predominant source of capital And their market values are always higher than the firms using debt in the same line of business. since the debt has a cost and the equity has no apparent cost the increased amount of equity would bring down the cost of capital and therefore maximize the value of the firm do you agree with the statement?discuss

two firms x and y are Implementing the same project with dept of rs 500 lakh and rs700 lakh respectively. the cost of debt for x and y are 12% and 15% respectively. the expected level of earning before interest And tax from these projects are rs 300lakh annually. both rhe firm are subject to income tax at the ratio of 35%.

1.find the amount of earning available for the shareholders of each firm.
2.find out the value of equity value of the firm and the overall cost of capital for both the firm on the basis of NI approach when costs of equity for firm x and firm y are 22% and 24% respectively​

Answer 1

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Explanation:   # For Firm- X

   30000000*6/12*35/100

=   5250000-(Debt of Rs.5000000)

=   250000 (Say , Profit)

# For Firm-Y

30000000*6/12*35/100

=    5250000-(Debt of Rs, 70000000)

=    -2250000 (Say, Loss means Firm-Y Doob gaya)

  # Equity value of Firm - X

250000

# Equity value of Firm- Y

-2250000

# Overall cost of capital for both the firm

(120000000-30000000)*46/100

= 41400000