We are considering one levered and another unlevered firm in the pharmaceutical industry having different capital structure and same net operating income. The cost of debt is 8%, corporate tax rate 22.5% and cost of equity is 10% and 12% respectively for unlevered and levered firms. Firm A has Rs 200 crores debenture and firm B does not have any debt. Net operating income is Rs 50 crores. Assuming MM hypothesis without tax and an equity holder holding 10% of the shares explain how you arrive at the equilibrium. Is it proper to consider cost of equity at different rates for the two kind of firms.