S$\mathrm{.}38$

A Supplement to Fundamentals of Financial Management

$4.$ VALUE OF FIRM THROUGH NI$/$NOI$/$MM APPROACH

Problem $8$: $($Illustration $9,$ Page $9\mathrm{.}25$ of the book$)$: Two companies are identical in all respects except that X Ltd$.$ has debt of $5,00,000$ borrowed at the rate of $12\%$ whereas Y Ltd$.$ has no debt in its capital structure. The total assets of both the companies amount to $15,00,000$ on which the companies have earnings of $20\%.$ You are required to do the following:

$($i$)$ Calculate value of companies and $k_0$ using NI approach taking $k_e$ as $18\%.$

$($ii$)$ Calculate value of companies and $k_e$ using NOI approach taking $k_0$ as $18\%.$

$($iii$)$ Compare the results and comment on the differences of the two approaches.

Solution: Steps: $($i$),($ii$)$ and $($iii$)$