The values for the two firms X and Y in accordance with the traditional theory are given below: [10 Marks] Unlevered firm X Levered firm Y Expected net operating income (NOD) 50000 50000 Total cost of debt (Kd) 0 10000 Net Income (NOI-Kd) 50000 40000 Cost of equity (Ke) 0

The values for the two firms X and Y in accordance with the traditional theory are given below: [10 Marks] Unlevered firm X Levered firm Y Expected net operating income (NOD) 50000 50000 Total cost of debt (Kd) 0 10000 Net Income (NOI-Kd) 50000 40000 Cost of equity (Ke) 0.1 0.11 Market value of shares (Ve) 500000 360000 Market value of debt (Vd) 0 200000 Total value of firm (V=Ve+Vd) 500000 560000 Average cost of capital (WACC), NOIV 10.00% 8.93% Debt-equity ratio 0.00 0.556 Compute the values for firms X and Y as per the MM hypothesis. Assume that (i) corporate income taxes do not exist, and (ii) the equilibrium value of average cost of capital (WACC) is 12.5 percent.