The operating income of Fine Crockery Ltd. is ₹9 lakhs before interest and taxes. The cost of debt is 10 percent and the current borrowing is ₹30 lakhs. The cost of capital is 12%. Calculate the cost of equity for Fine C

Calculation of Cost of Equity (K e ) for Fine Crockery Ltd. Given Information: Operating Income (EBIT) = ₹9 lakhs Cost of Debt (K d ) = 10% Current Borrowing (Debt) = ₹30 lakhs Overall Cost of Capital (K o ) = 12% Taxation is to be ignored. 1. Calculate Interest Expense: Interest = Debt × Cost of Debt Interest = ₹30 lakhs × 10% = ₹3 lakhs 2. Calculate Earnings Before Tax (EBT): EBT = EBIT - Interest EBT = ₹9 lakhs - ₹3 lakhs = ₹6 lakhs 3. Calculate Value of the Firm (V): Using the Net Operating Income (NOI) approach (since K o is given and taxation is ignored): Value of Firm (V) = EBIT / K o V = ₹9 lakhs / 0.12 = ₹75 lakhs 4. Calculate Value of Equity (S): Value of Firm (V) = Value of Debt (D) + Value of Equity (S) S = V - D S = ₹75 lakhs - ₹30 lakhs = ₹45 lakhs 5. Calculate Cost of Equity (K e ): Using the formula for K e under the NOI approach (without taxes): K e = EBT / Value of Equity K e = ₹6 lakhs / ₹45 lakhs K e = 0.1333 or 13.33% The Cost of Equity (K e ) for Fine Crockery Ltd. is 13.33% .