Question

A Ltd., expects a net operating income of Rs. 1,20,000. It has Rs.6,00,000 6% debentures. The overall Capitalization rate is 10%. Calculate the Value of the firm and cost of equity according to the Net Operating Income (NOI) Approach What will be the value of the firm and cost of equity it debenture debt is increased to Rs.9,00,000?​

Answer 1

Explanation:

Net Income Rs. 2,00,000

Less: Interest on 10% Debenture of Rs. 5,00,000 Rs. 50,000

Earnings available to equity shareholders Rs. 1,50,000

Market Capitalization Rate 12.5%

Market Value of the Equity (S) = 1,50,000* Rs. 12,00,000

Market Value of Debenture (D) Rs. 5,00,000

Value of the Firm (S+D) Rs. 17,00,000