There are 2 companies namely x and y. Company x is unlevered and company y is levered with Rs.175000 at 4% bonds. Both the companies earn Rs.45000 before tax. Capitalisation rate is 12% and corporate tax is 40%. Calculate their market value.

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29-09-2020
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题

There are 2 companies namely x and y. Company x is unlevered and company y is levered with Rs.175000 at 4% bonds. Both the companies earn Rs.45000 before tax. Capitalisation rate is 12% and corporate tax is 40%. Calculate their market value.

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Solution

The solution is given below −

Company X is unlevered, which means, interest on debt is 0.

Company y is levered, which means, interest on debt is 7000 (175000*4%)

Market value

	Company X	Company Y
	Rs	Rs
Net operating income	45000	45000
Interest on debt	0	7000
	45000	38000
Profit before taxes	45000	38000
Taxes (40%)	18000	15200
	27000	22800
Capitalization rate (12%)	0.12	0.12
Market value equity	225000	190000
Market value of debt	0	175000
Total value	225000	365000

Published on 28-Sep-2020 14:42:12

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