16. P Ltd. and Q 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 `5,60,000. The only differences between the companies are in their financial structures and their market values. Details of those are given as follows:

Particulars X Ltd. Y Ltd.

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

`20,00,000

`20,00,000 15%

10%

100%

`40,00,000

—

14%

—

100%

Suppose you are the owner of the 10% of the equity of P Ltd. If you agreed with the propositions of Modigliani and Miller, would you retain your shares in P Ltd. or could you improve your financial position? Justify your answer.