Total Marks 15
A 100% Equity (or Un-Levered) firm has assets whose market value is Rs
100,000. The firm has issued 1,000 shares to shareholders in the
market. The shareholders require a return of 20% pa. The Corporate
Tax Rate is 50%. EBIT remains fixed at Rs 40,000.
a Assume MM (with Taxes). What is the Market Value of the
Equity of the Un-Levered Firm? What is the WACC?
b Assume MM (with Taxes). Given Data: Now, suppose that the
Firm takes a loan of Rs 50,000 and uses that to replace (buyback) the same amount of equity. The cost of debt including
mark-up (or interest) is 10% pa. Compute the Total Market
Value of the Levered firm, the Market Value of Equity for the
Levered Firm, and WACC for the Levered Firm.
c Assume Traditionalists / Tradeoff Theory (with Taxes). Use Tax
Shield Approach to estimate the Total Market Value of the
Levered Firm (VL) and the Market Value of Equity for the
Levered Firm (EL).