Quesl. The following is the data regarding two companies X and Y belonging to the same risk class:
Com an X Com an Y
No. of or shares 90,000 150000
Market rice er share 1.20 1.00
EBIT 18000 18000
60 0 Debentures 60 000
All profits after debenture interest are distributed as dividends.
Explain how under MM approach an investor holding 10% shares in company X will be better off in switching his holding to company Y.
Ques.2 The expected annual net operating income of company is
The company has 10% debentures. The overall cost of capital is
12.5%. Calculate the value of firm and cost of equity according to NOI approach.
If the company increases the debt from what
would be the value of the firm?
Instruction:
Show all the calculations clearly.
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