Compute value of firms x and y using the net income approach

Reference no: EM133331526

Question: Company X and Company Y are in the same risk class, and are identical in every fashion except that Company X uses debt while Company Y does not. The levered firm has Shs 900,000 debentures, carrying 10% rate of interest. Both the firms earn 20% before interest and taxes on their total assets of Shs 1,500,000. Assume perfect capital markets, rational investors and so on; a tax rate of 50% and Capitalisation rate of 15% for an all equity company.

(i) Compute the value of firms X and Y using the net income (NI) approach.

(ii) Compute the value of each firm using the net operating income (NOI) approach.

(iii) Using the NOI approach, calculate the overall cost of capital (ko) for firms X and Y.

(iv) Which of these two firms has an optimal capital structure according to the NOI approach? Why?

Reference no: EM133331526

Questions Cloud

Describle one hedge fund strategy in detail : Discuss 3 ways in which a hedge funds differ from a typical mutual fund and Describle one hedge fund strategy in detail

What is the return on her strategyr in dollars : What is the return on her strategyr in dollars? What is the return as a percentage of the initial long position? What is the annualized return?

What would need to happen if the us enters a recession : What was different in 2008 relative to 2022 that made the returns from bonds so good? c. "Miss Pollock said she wishes she didn't have so much money tied up

Analyze the company financial statements : Conduct an in-depth understanding of the financial analysis, and value of money over time. Please address the following by analyzing Microsoft company

Compute value of firms x and y using the net income approach : Compute the value of firms X and Y using the net income (NI) approach. Compute the value of each firm using the net operating income (NOI) approach.

How has technology shaped intelligence practices : how has technology shaped intelligence practices in the United States since the 1970s, and what have been the main challenges, techniques, and outcomes?

What was the industrial revolution : WhaT was The IndusTrial RevoluTion? Name and describe 2 diseases of The IndusTrial revoluTion. Explain some of The causes or effecTs of diseases during

What was the easter rising what was its importance : What was the Easter Rising? What was its importance to Irish history? Who were the seven signatories of the Proclamation issued during the Easter Rising?

Describe the history and various problems : where such a model is entirely alien has more often than not been plagued with problems and even failure. Describe and explain, with examples, the history

User Account

All Pages