Calculate market equity using below data according to the M-M Approach.




Company X Company Y

Rs Rs
Net operating income 20000 20000
Cost of debt 0 2500
Net income 20000 17500
Cost of equity 0.08 0.10
Market value of shares 250000 175000
Market value of debt 0 50000
Total value of firm 250000 225000
Cost of capital (Avg) 0.95 0.08
Debt equity ratio 0 0.8

Assumptions: 1) no corporate tax 2) equilibrium value is 12%.

Solution

The solution is explained below −


Company X Company Y

Rs Rs
Net operating income 20000 20000
(-)

Cost of debt 0 2500
Net income 20000 17500
Equilibrium cost of equity (12.5%) 0.125 0.125
Value of firm 160000 140000
Market value of debt 0 50000
Market value if equity 160000 90000
Updated on: 2020-09-28T11:15:37+05:30

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