Problem: A 100% Equity (or Un-Levered) firm has assets whose market value is Rs 100,000.  The firm has issued 1,000 shares to shareholders in the market.  The shareholders require a return of 20% pa.  The Corporate Tax Rate is 50%.  EBIT remains fixed at Rs 40,000.

Required:

1. Assume MM (with Taxes).  What is the Market Value of the Equity of the Un-Levered Firm?  What is the WACC?
2. Assume MM (with Taxes).  Given Data:  Now, suppose that the Firm takes a loan of Rs 50,000 and uses that to replace (buy-back) the same amount of equity.  The cost of debt including mark-up (or interest) is 10% pa.  Compute the Total Market Value of the Levered firm, the Market Value of Equity for the Levered Firm, and WACC for the Levered Firm.
3. Assume Traditionalists / Tradeoff Theory (with Taxes).  Use Tax Shield Approach to estimate the Total Market Value of the Levered Firm (VL) and the Market Value of Equity for the Levered Firm (EL).