● 15. X Ltd. and Y Ltd. are two companies in the same industry. They have the same business risk and identical in all respects. The annual profit of both companies is `2,80,000. The only differences between the companies are in their financial structures and their market values. Details of those are given below:

Particulars X Ltd. Y Ltd.

Equity shares of `10 each 10% debentures Cost of equity Cost of debt Pay-out ratio

`10,00,000

`10,00,000 15%

10%

100%

`20,00,000

—

14%

—

100%

(i) You are required to calculate for each company the following:

(a) Market value of equity;

(b) Market value of debt and

(c) Market value of the company. Ignore taxes.

(ii) Suppose you are the owner of the 10% of the equity of X Ltd. If you agreed with the propositions of Modigliani and Miller, would you retain your shares in X Ltd.

or could you improve your financial position? Justify your answer.