The Question is complete, please ignore the blank space in the middle. В.Two companies X and Y belong to the equivalent risk group. The two companies areidentical in every respect except that company Y is levered, while X is unlevered. Theoutstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. Theother information for the two companies is as follows:ParticularsNet operating income-InterestEarnings to Equity Share HoldersY1,50,00060,00090,0001,50,0001,50,000Equity capitalization rateMarket value of equityMarket value of debtTotal value of the firm, VOverall capitalization rate (Ko = EBITV)Debt-Equity Ratio0.204,50,0006,00,00010,50,00014.3%1.330.1510,00,00010,00,00015%An investor owns 5% equity shares of company Y. Show the process and the amount by whichhe could reduce his outlay through use of the arbitrage process. Is there any limit to theprocess?

В. identical in every respect except that company Y is levered, while X is unlevered. The outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The other information for the two companies is as follows: Particulars Two companies X and Y belong to the equivalent risk group. The two companies are Y 1,50,000 60,000 90,000 1,50,000 Net operating income -Interest Earnings to Equity Share Holders 1,50,000 Equity capitalization rate Market value of equity Market value of debt Total value of the firm, V Overall capitalization rate (Ko EBIT/V) Debt-Equity Ratio 0.20 4,50,000 6,00,000 10,50,000 14.3% 1.33 0.15 10,00,000 10,00,000 15% An investor owns 5% equity shares of company Y. Show the process and the amount by which he could reduce his outlay through use of the arbitrage process. Is there any limit to the process?

В. identical in every respect except that company Y is levered, while X is unlevered. The outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The other information for the two companies is as follows: Particulars Two companies X and Y belong to the equivalent risk group. The two companies are Y 1,50,000 60,000 90,000 1,50,000 Net operating income -Interest Earnings to Equity Share Holders 1,50,000 Equity capitalization rate Market value of equity Market value of debt Total value of the firm, V Overall capitalization rate (Ko EBIT/V) Debt-Equity Ratio 0.20 4,50,000 6,00,000 10,50,000 14.3% 1.33 0.15 10,00,000 10,00,000 15% An investor owns 5% equity shares of company Y. Show the process and the amount by which he could reduce his outlay through use of the arbitrage process. Is there any limit to the process?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2MC

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