Companies U and L are identical in every respect, except that U is unlevered while L is levered. Company L has 20 lakh of 8% debentures outstanding. Assume that : (i) All the MM assumptions are met. (ii) The tax rate is

According to the Modigliani-Miller (MM) approach with corporate taxes, the value of a levered firm is greater than the value of an unlevered firm due to the tax shield provided by debt. Given: EBIT = ₹6,00,000 Tax Rate (t) = 50% or 0.50 Equity Capitalization Rate for Unlevered Firm (Keu) = 10% or 0.10 Debt of Company L (D) = ₹20,00,000 @ 8% 1. Value of Unlevered Firm (Vu): Vu = EBIT × (1 - t) / Keu Vu = ₹6,00,000 × (1 - 0.50) / 0.10 Vu = ₹6,00,000 × 0.50 / 0.10 Vu = ₹3,00,000 / 0.10 Vu = ₹30,00,000 2. Value of Levered Firm (Vl): According to MM Proposition II with taxes: Vl = Vu + (Debt × Tax Rate) Vl = ₹30,00,000 + (₹20,00,000 × 0.50) Vl = ₹30,00,000 + ₹10,00,000 Vl = ₹40,00,000 Therefore, the value of Company U (unlevered) is ₹30,00,000 and the value of Company L (levered) is ₹40,00,000.