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Calculate the values of two firms

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There are two firms which are identical in all respects except in terms of their capital structure as can be observed from the details given below:

                                          R Ltd.                      S Ltd.

                                          Levered            Unlevered

EBIT (Rs.)                       2,00,000            2,00,000

Debt (Rs.)                           6,00,000               0

Rate of Debt                             15%                   __

Ke                                            20%                    15%

Question 1: Calculate the values of two firms and illustrate using MM approach how an investor holding 10% shares of R Ltd. will be benefitted by switching over his investment from R Ltd. to S Ltd. Why?

Reference no: EM132611011

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