IndigoLearn

Capital structure - Arbitrage

Sir, Is this SM solution regarding Change in return part is correct ? If we calculate Income from levered company, it would be 30000�16.25% = 4875. i.e WKT 39000÷240000=16.25%. Income from levered firm going to be (30000 - 10000)�15% = 3000 Kindly Need clarification !

Attachments

Screenshot_2021-02-08-23-49-20-045_com.google.android.apps.docs.png


Madhaan S

Madhaan S

CA Inter

9K+

09-Feb-21 12:32

16

Answers (5)

Best Answer

Sir, my question is why we are calculating return specifically from "Income from (Shares) of Levered and unlevered firm" and why not from EBIT ? In previous ques we calculated return from EBIT. screenshot of ques attached.

Please read last line of the solution of previous illustration (Ill6) there they clearly state the diff in solutions in both the examples and how both are ok. In ill 6 they invested only a portion of the amount representing in an unlevered firm representing similar return as the investor had in the levered firm. in illustration 7: they invested full amount in unlevered firm. Both ways are correct unless a method is specifically asked in the exam


Sriram Somayajula

Sriram Somayajula

Admin

14-Feb-21 10:21

* 1st - Income from unlevered company. Sorry for typo.


Madhaan S

Madhaan S

CA Inter

9K+

09-Feb-21 12:37

we are unable to understand text in your message. please write your issue in a piece of paper and take a pic and send it to us. we will be able to understand


Sriram Somayajula

Sriram Somayajula

Admin

10-Feb-21 12:53

Sir, my question is why we are calculating return specifically from "Income from (Shares) of Levered and unlevered firm" and why not from EBIT ? In previous ques we calculated return from EBIT. screenshot of ques attached.


Madhaan S

Madhaan S

CA Inter

9K+

13-Feb-21 22:50