Question
Company A (levered) and Company B (unlevered) are identical in all aspects except that A has 7% outstanding debt of Rs. 2,00,000. According to NI
Company A (levered) and Company B (unlevered) are identical in all aspects except that A has 7% outstanding debt of Rs. 2,00,000. According to NI approach, the valuation of both the companies is given below:
ParticularsCompany ACompany BNet operating income60,00060,000Total cost of debt014,000Net earnings60,00046,000Cost of equity0.100.11Market value of shares6,00,0004,18,000Market value of debt02,00,000Total value of the firm6,00,0006,32,000Mr. Ajay holds Rs. 2,000 worth of Company As shares. Is it possible for Ajay to reduce his investment in order to earn the same return by using arbitrage? Illustrate.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Investments
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter
8th Canadian Edition
007133887X, 978-0071338875
