Consider a firm X Ltd., having the following details : EBIT = ₹1,00,000 Debt borrowed at the rate of 10% = ₹5,00,000 Overall Capitalisation rate (Ko) = 12.5% Find the value of the firm when : (1) Debt is increased by ₹2,

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2017
Consider a firm X Ltd., having the following details : EBIT = ₹1,00,000 Debt borrowed at the rate of 10% = ₹5,00,000 Overall Capitalisation rate (Ko) = 12.5% Find the value of the firm when : (1) Debt is increased by ₹2,00,000 (2) Debt is decreased by ₹2,00,000 Also calculate cost of equity in each case.

Answer & Explanation:

Particulars Debt is increased by ₹2,00,000 (₹) Debt is decreased by ₹2,00,000 (₹) EBIT 1,00,000 1,00,000 Less: Interest 70,000 (10% of ₹7,00,000) 30,000 (10% of ₹3,00,000) Net profit 30,000 70,000 K o 12.5% 12.5% Value of firm (EBIT/ K o ) 8,00,000 8,00,000 Less: value of debt 7,00,000 (₹5,00,000 + ₹2,00,000) 3,00,000 (₹5,00,000 - ₹2,00,000) Value of equity (E) 1,00,000 5,00,000 Cost of equity (K e ) = (Net profit/E)*100 30% ( 30,000 / 1,00,000 * 100) 14% ( 70,000 / 5,00,000 * 100)

Topics: Financial Management

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