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Q.No: 4
In considering the most appropriate capital structure for the NOID Manufacturers Ltd (NML), its finance
department has made estimates of the interest rate on debt and the cost of equity capital at various levels of debt-
equity mix summarised below The debt is in the form of 10-year redeemable at par Rs 1,000 debentures with coupon
rates varying with the equity-debt ratio and 5 per cent flotation cost. As a matter of policy, NML always keeps 10 per
cent of its finances in the form of preference shares carrying 2 per cent extra return compared to the debenture
coupon rates. The duration and the flotation costs are similar to debentures. Required Assuming (i) 17.5 per cent
dividend distribution tax and (ii) corporate tax rate, 35 per cent, determine the optimal capital structure (debt-equity
mix) for the VAL
LAD
35
15
5
Answer
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Answer 1

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Answer 2

Answer:

in the form of 10-year redeemable at par Rs 1,000 debentures with coupon rates varying with the equity-debt ratio and 5 per cent flotation cost. As a matter of policy, NML always keeps 10 per cent of its finances in the form of preference shares carrying 2 per cent extra return compared to the debenture coupon