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

Banking & FinanceFinance ManagementGrowth & Empowerment


Company XCompany Y

RsRs
Net operating income2000020000
Cost of debt02500
Net income2000017500
Cost of equity0.080.10
Market value of shares250000175000
Market value of debt050000
Total value of firm250000225000
Cost of capital (Avg)0.950.08
Debt equity ratio00.8

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

Solution

The solution is explained below −


Company XCompany Y

RsRs
Net operating income2000020000
(-)

Cost of debt02500
Net income2000017500
Equilibrium cost of equity (12.5%)0.1250.125
Value of firm160000140000
Market value of debt050000
Market value if equity16000090000
raja
Published on 28-Sep-2020 14:44:37
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