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4 Explain the factors affecting Capital Structure. Solve the below given problem: Given below are two firms, A and B, which are identical in all aspects except the degree of leverage employed by them. What is the average cost of capital of both firms? Details of Firms A and B Firm A Firm B Net operating income EBIT Rs. 1, 00, 000 Rs. 1, 00, 000 Interest on debentures I Nil Rs. 25, 000 Equity earnings E Rs. 1, 00, 000 Rs. 75, 000 Cost of equity Ke 15% 15% Cost of debentures Kd 10% 10% Market value of equity S = E/Ke Rs. 6, 66, 667 Rs. 5,00, 000 Market value of debt B Nil Rs. 2, 50, 000 Total value of firm V Rs. 6, 66, 667 Rs. 7, 50, 000 Explanation of factors affecting capital structure Solution for the problem Interpretation

February 27, 2015 By: Meliza Category: 1st SEM

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