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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%)

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 |

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