A company has an EBIT of ₹10,00,00,000 and belongs to a risk class of 15% i.e., its overall cost of capital is 15%. What is the cost of equity capital if it employs 10% debt to the extent of 30%, 40% or 50% of total capi
CS Executive · Corporate Accounting and Financial Management · PYQS · December 2024
A company has an EBIT of ₹10,00,00,000 and belongs to a risk class of 15% i.e., its overall cost of capital is 15%. What is the cost of equity capital if it employs 10% debt to the extent of 30%, 40% or 50% of total capital of ₹50,00,00,000/- Assume net operating income approach applies.
Answer & Explanation:
Calculation of Cost of Equity Capital Particulars 30% Debt 40% Debt 50% Debt EBIT (A) 10,00,00,000 10,00,00,000 10,00,00,000 Overall Cost of Capital (K o ) 15% 15% 15% Value of firm (V = EBIT/K o ) 66,66,66,667 66,66,66,667 66,66,66,667 Total Capital 50,00,00,000 50,00,00,000 50,00,00,000 Value of debt (D) 15,00,00,000 20,00,00,000 25,00,00,000 Value of Equity (E = V-D) 51,66,66,667 46,66,66,667 41,66,66,667 Interest Rate 10% 10% 10% Interest on Debt (B) 1,50,00,000 2,00,00,000 2,50,00,000 Net Profit available for equity holders (A-B) 8,50,00,000 8,00,00,000 7,50,00,000 K e (Net Profit for equity holders/ value of equity) 16.45% 17.14% 18.00%
Topics: Financial Management
Related Questions in this Topic
- One of the main objectives of a business organization is profit maximization though there are other objectives like serv...
- Decisions on investments are determined by various factors like risk involved, return, purpose, period etc. Do you think...
- "Capital Budgeting is important not only because of the high investment cost of capital projects, but also due to their ...
- "Cash Flow Analysis is an important financial tool for management in decision making." Explain this statement and discus...
- The value of the company can be maximized if the shareholders' wealth is maximized. The par value of equity share of COM...