(a) Leo Ltd. has a net operating income of 21,60,000 and the total capitalisation of 120...

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(a) Leo Ltd. has a net operating income of 21,60,000 and the total capitalisation of 120 lakhs. The company is evaluating the options to introduce debt financing in the capital structure and the following information is available at various levels of debt value. Debt value (3) 0 10,00,000 20,00,000 30,00,000 40,00,000 50,00,000 60,00,000 70,00,000 80,00,000 Interest rate (%) Equity Capitalisation rate (%) 12.00 12.50 13.00 13.50 14.00 15.00 16.00 17.00 20.00 N.A. 7.00 7.00 7.50 7.50 8.00 8.50 9.00 10.00 You are required to COMPUTE the equity capitalization rate if MM approach is followed. Assume that the firm operates in zero tax regime and calculations to be based on book values. [8 Marks] [2 marks] (b) BRIEF OUT the remedies for Over-Capitalisation. (a) Leo Ltd. has a net operating income of 21,60,000 and the total capitalisation of 120 lakhs. The company is evaluating the options to introduce debt financing in the capital structure and the following information is available at various levels of debt value. Debt value (3) 0 10,00,000 20,00,000 30,00,000 40,00,000 50,00,000 60,00,000 70,00,000 80,00,000 Interest rate (%) Equity Capitalisation rate (%) 12.00 12.50 13.00 13.50 14.00 15.00 16.00 17.00 20.00 N.A. 7.00 7.00 7.50 7.50 8.00 8.50 9.00 10.00 You are required to COMPUTE the equity capitalization rate if MM approach is followed. Assume that the firm operates in zero tax regime and calculations to be based on book values. [8 Marks] [2 marks] (b) BRIEF OUT the remedies for Over-Capitalisation.

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a According to the ModiglianiMiller MM approach the cost of equity remains constant irrespective of ... View the full answer