Question

U Ltd and L Ltd are in the same risk class and are identical in all respects except that
company I uses debt while company U does not use debt. Company L has debentures of Rs.
10 lakh carrying 10% rate of interest. Both the firms earn 20% operating profits on their total
assets of Rs 20 lakh. Equty capitalization rate is 15%,
You are required to compute the following for U Ltd, using Net Income Approach:
(a) Value of companies
(b) Overall cost of capital (K)
Also state which company has optimum capital structure and why? Assume there are no
taxes.​

Answer 1

Answer:

very hard question not easy