● X Ltd. has an annual EBIT of `1,35,000. Currently, it has 70,000 equity shares of `10 per share and 3,000, 8% Debentures of `100 each. The Equity Capitalisation rate is 12%.

(a) Calculate the value of the firm and overall Cost of Capital under existing situation.

(b) In order to exploit the Trading on Equity advantage, the firm is contemplating to increase the proportion of Debt Capital to 50% of the total capital from the current level of 30%. For this, the firm is ready to issue new 8% debentures of `100 each to buyback `2,00,000 equity share capital at par. What will be the effect of such a financing decision on the value of the firm and its overall Cost of Capital ?

(c) What will be the consequences if Debt Capital is increased to 60% of total capital by issuing the same 8% debentures of `100 each and buying back the shares accordingly?

Assume taxes do not exist. Consider NI Approach.