Reference no: EM132498026

Question 1: A Limited and B Limited are identical except for capital structures. A Ltd. Has 50 % debt and 50 % equity, whereas B Ltd. has 20 % debt and 80 % equity (all percentages are in market value terms). The borrowing rate for both companies is 8 % in a no-tax world, and capital markets are assumed to be perfect. If you own 2 % of the shares of A Ltd. and the company has a net operating income of Rs. 3,60,000 and the overall capitalization rate of the company, k0 is 18%, what is the implied required rate of return on equity?

Option 1: 26%

Option 2: 27%

Option 3: 28%

Option 4: 29%

Question 2: In the above question, if B Ltd. has the same net operating income as A Ltd., what is the implied equity return of B Ltd.?

Option 1: 20.2%

Option 2: 20.5%

Option 3: 20.8%

Option 4: 20.9%