U Ltd. and L Ltd. are in the same risk class and are identical in all respects except that
company L 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. Equity 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 (K0)
Also state which company has optimum capital structure and why? Assume there are no
taxes.
Answers
Answered by
1
Overall costs of capital is correct answer
Similar questions