The following data relate to two companies belonging to the same risk class: Particulars A Ltd. B Ltd. Expected Net Operating Income 18,00,000…

Assuming no tax as per MM Approach. Calculation of Value of Firms 'A Ltd.' and 'B Ltd' according to MM Hypothesis Market Value of 'B Ltd' [Unlevered(u)] Total Value of Unlevered Firm (V u ) = [ NOI/k e ] = 18,00,000/0.18 = 1,00,00,000 K e of Unlevered Firm (given) = 0.18 K o of Unlevered Firm (Same as above) = k e (as there is no debt) = 0.18 Market Value of 'A Ltd' [Levered Firm (l)] Total Value of Levered Firm (V L ) = V u + (Debt× Nil) = 1,00,00,000 + (54,00,000 × nil) = 1,00,00,000 Computation of Equity Capitalization Rate and Weighted Average Cost of Capital (WACC) Particulars A Ltd. B Ltd. A. Net Operating Income (NOI) 18,00,000 18,00,000 B. Less: Interest on Debt (I) 6,48,000 - C. Earnings of Equity Shareholders (NI) 11,52,000 18,00,000 D. Overall Capitalization Rate (k o ) 0.18 0.18 E. Total Value of Firm (V = NOI/k o ) 1,00,00,000 1,00,00,000 F. Less: Market Value of Debt 54,00,000 - G. Market Value of Equity (S) 46,00,000 1,00,00,000 H. Equity Capitalization Rate [k e = NI /S] 0.2504 0.18 I. Weighted Average Cost of Capital [WACC] (k o ) 0.18 0.18