What should be the equity capitalisation rate

Reference no: EM13926268

Kelley Manufacturing Co. has a total capitalization of Rs. 1,000,000, and it normally earns Rs 100,000 (before interest and taxes). The financial manager of the firm wants to take a decision regarding the capital structure. After a study of the capital market, he gathers the following data:

(a) What amount of debt should be employed by the firm if the traditional approach is held valid?

(b) If the Modigliani-Miller approach is followed, what should be the equity capitalisation rate? Assume that corporate taxes do not exist, and that the firm always maintains its capital structure at book values.

Amount of Debt Rs	Interest Rate%	Equity Capitalisation Rate % (at given level of debt)
0	-	10
100,000	4	10.5
200,000	4	11
300,000	4.5	11.6
400,000	5	12.4
500,000	5.5	13.5
600,000	6	16
700,000	8	20

Reference no: EM13926268

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