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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: 28-Sep-2020
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