Based on above calculations under the assumptions mentioned, we can see the following facts in calculations of valuation of Un-Geared & Geared companies:

1. Value of equity in an Un-Geared company remains unchanged/fixed.
2. Value of Geared company decreased by exactly with the value of loan at all level of Gearing.
3. WACOC is fixed at all levels of gearing and there is no decrease related with gearing.

4. Value of tax for share holders in un geared and geared companies will be the same (as proved in theory); the decrease in value of tax in calculations is only because of the difference in equity investment in each company.

5. Value of Business will only be affected if there is difference in expected rate of return (Re) and actual rate of return (Ra) earned by business for equity holders;

   i.e if expected rate of return by equity holder is less than the earned rate, than value of that business will be high and Vice versa.

   Re = Ra = Value unchanged (Actual Value)
   Re < Ra Value will be high
   Re > Ra Value of business will be less

Reconciliation

Net affect of Savings/Extra Profit earned: Against Acceptance of Loan as Liability on Business

COMPANY NAME	U (US$)	G1 (US$)	G2 (US$)	G3 (US$)	G4 (US$)
Extra Profit Earned	-	-	-	-	-
Extra Distributions from Profits Interest	-	(1,000)	(1,500)	(2,000)	(2,500)
Tax	-	(400)	(600)	(800)	(1,000)
Net Increase (decrease) in Profits of Geared company	-	(600)	(900)	(1,200)	(1,500)
Re	0.150	0.173	0.189	0.210	0.240
Value of Extra Profits (Loss)	-	(3,478)	(4,773)	(5,714)	(6,250)
Less: Loans	-	(10,000)	(15,000)	(20,000)	(25,000)
Value of Loss of Equity on Extra Profits Earned	-	(13,478)	(19,773)	(25,714)	(31,250)

Loss on Value of Un Geared Profits After Increase of Risk and Re:

Value of Un Geared Net Profits for Geared Companies	U (US$)	G1 (US$)	G2 (US$)	G3 (US$)	G4 (US$)
Net Profits of Un Geared Company	7,500	7,500	7,500	7,500	7,500
Re	0.150	0.173	0.189	0.210	0.240
Value of un-geared Net Profits (Loss)	50,000	43,478	39,773	35,714	31,250
Increase (Decrease) in Value of Equity Due to increase in Risk & Re	-	3,478	4,773	5,714	6,250

Total Loss of Equity:

	U (US$)	G1 (US$)	G2 (US$)	G3 (US$)	G4 (US$)
Value of Loss of Equity on Extra Profits	-	(13,478)	(19,773)	(25,714)	(31,250)
Value of gain (Loss) of Equity on Original ungeared Profits of Business	-	3,478	4,773	5,714	6,250
TOTAL LOSS OF EQUITY	-	(10,000)	(15,000)	(20,000)	(25,000)

Above reconciliation shows that Total Net Loss is the same as calculated & Discussed in earlier pages.

SUMMARY

Effects upon conversion of Un-Geared company into Geared Company

When ever any company is raising funds through gearing up and increase the risk of Equity, than following will be the net results:

• There will be small increase in Value of Existing profits if equity is decreasing and capital employed is fixed (on the day it will be geared). However it will decrease if equity investment is fixed at all geared levels.
• Extra profits/loss earned when compared with extra liabilities again the NPV will be negative.
• Total of both of above will be equal to net decrease in value of equity which is exactly the loan amount.