X and Y are the same risk company. Company Y has Debenture Tk. 2,50,000. Interest rate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
X and Y are the same risk company. Company Y has Debenture Tk. 2,50,000. Interest rate @10%. Value of the companies and Cost of capital of both firm are given below: Particulars Earning before interest & tax (EBIT) Less Interest on Debenture Net Income (NI) Cost of Equity (Ke) Market value of Share Capital (NI/Ke) Value of Debenture (B) Value of the firm V = (S+ B) Average cost of capital (Ko) = (EBIT/V)*100 Company - X 3,75,000 3,75,000 12.50% 30,00,000 30,00,000 12.50 % Company - Y 3,75,000 25,000 3,50,000 14% 25,00,000 2,50,000 27,50,000 13.64% Miss. Mukta, who 10% equity share of X Company. Should she prefer switching from the arbitrage process? Is it possible for Miss. Mukta to reduce his outlay to earn same return through the use of arbitrage? Illustrate it. X and Y are the same risk company. Company Y has Debenture Tk. 2,50,000. Interest rate @10%. Value of the companies and Cost of capital of both firm are given below: Particulars Earning before interest & tax (EBIT) Less Interest on Debenture Net Income (NI) Cost of Equity (Ke) Market value of Share Capital (NI/Ke) Value of Debenture (B) Value of the firm V = (S+ B) Average cost of capital (Ko) = (EBIT/V)*100 Company - X 3,75,000 3,75,000 12.50% 30,00,000 30,00,000 12.50 % Company - Y 3,75,000 25,000 3,50,000 14% 25,00,000 2,50,000 27,50,000 13.64% Miss. Mukta, who 10% equity share of X Company. Should she prefer switching from the arbitrage process? Is it possible for Miss. Mukta to reduce his outlay to earn same return through the use of arbitrage? Illustrate it.
Expert Answer:
Related Book For
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb
Posted Date:
Students also viewed these accounting questions
-
Is it possible for a firm to have a large Retained Earnings balance and no cash? Explain.
-
Is it possible for a company to spend more money on the innovation process than on providing goods and services to current customers?
-
Is it possible for a company to have a two-stage allocation system but use, for example, direct labor-hours to allocate costs from all pools in the second stage? Will the resulting product costs be...
-
Briefly explain the meaning of the following concepts and terms: greenhouse gases (GHGs), the IPCC, the little ice age, the Keeling graph, telekinetic property of the atmosphere, global weirding,...
-
Esmeralda is an attorney. Before 2011, she is employed by the law firm of Ellis and Morgan (E&M). Esmeralda is not a partner in E&M; her compensation consists of a fixed salary and a percentage of...
-
In Exercises 512, determine whether the given procedure results in a binomial distribution or a distribution that can be treated as binomial (by applying the 5% guideline for cumbersome...
-
Repeat Example 6.4 but let the collision be totally inelastic. Data from Example 6.4 Consider a collision between the two carts of Table 6.1, starting from the same initial velocities, but with...
-
Novelties, Inc., produces and sells highly faddish products directed toward the preteen market. A new product has come onto the market that the company is anxious to produce and sell. Enough capacity...
-
How do you print the first value in a tuple called aVar?
-
Times are slow for your company right now and with the rising costs of material and wages, your profits are at an all-time low. Because of this unfortunate situation, you will need to let some...
-
Task 2 The statements of comprehensive income for Lotus Ltd and Orchid Ltd for the year ended 31 December 2016 are given as follows: Orchid Ltd Lotus Ltd Sales 500,000 (320,000) 180,000 10,000...
-
You are doing a calculation in which you must add two quantities \(A\) and \(B\). You know that \(A\) can be expressed as \(A=\frac{1}{2} a t^{2}\), where \(a\) has units of meters per second squared...
-
Translate this statement into a mathematical expression, using any symbols you wish, but include a "key" to the meaning of each symbol: A certain type of energy of an object is equal to the object's...
-
Planes fly at an altitude of \(35,000 \mathrm{ft}\) above sea level. What is this distance in miles? In meters?
-
Suppose you have a square of paper with a single vertical line down the middle and a single horizontal line across the middle. The upper left square is blank. The lower left and upper right squares...
-
You have four equilateral triangles, two red and two blue. You want to arrange them so that each blue triangle shares a side with the other blue triangle and with both red triangles, and each red...
-
Maria estimates she will need $35,000 per year in retirement. Social Security will pay $12,000 per year, so her savings must generate $23,000 per year for 20 years after she retires at age 67, based...
-
Decades after the event, Johnson & Johnson (J&J), the 130-year-old American multinational, is still praised for swiftly The company indicated that its response was based on the expectations set forth...
-
The following information was taken from the accounting records of Mitchell Company for last year: Management wants to organize these data into a better format so that financial statements can be...
-
Kelly Companys most recent contribution format income statement is shown below: Required: Prepare a new contribution format income statement under each of the following conditions (consider each case...
-
How is the CM per unit calculated? How is this value useful in planning business operations?
-
Explain the building blocks of accounting: ethics, principles, and assumptions.
-
On May 1, 2025, Park Flying School Ltd., a company that provides flying lessons, was started with an investment of 45,000 cash in the business. Following are the assets and liabilities of the company...
-
The historical cost basis results in: a. initially recording assets at cost and adjusting when the current value changes. b. keeping activities of an entity separate and distinct from its owner. c....
Study smarter with the SolutionInn App