Question

A company expects a net operating
income of Rs 2,00,000. It has Rs 10,





00,000 6% Debentures. The overall
capitalization rate is 10%. Calculate
the value of the firm and the equity
capitalization rate according to the
Net Income approach. Also if the
debt is increased to Rs 15,00,000,
what will be the effect on the value
of the firm and the equity
capitalization rate?​

Answer 1

The over all cost of capital may reduce as the proportion of debt increases in the capital structure because cost of debt is less than cost of equity, while on the other hand risk of the firm increases with the increase in the fixed contractual obligation, which again increases the weighted average cost of capita...