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Compute the value of companies for u ltd

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U Ltd. and L Ltd. are in the same risk class and are identical in all respects except that company L uses debt while company U does not use debt. Company L has debentures of Rs. 10 lakh carrying 10% rate of interest. Both the firms earn 20% operating profits on their total assets of Rs. 20 lakh. Equity capitalization rate is 15%.

Question 1: You are required to compute the following for U Ltd. using Net Income Approach:

(a) Value of companies

(b) Overall cost of capital (K0)

Also state which company has optimum capital structure and why? Assume there are no taxes.

Reference no: EM132584377

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