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Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.?
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Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to...
Calculation of Firm Value and Cost of Equity
Given:
EBIT = Rs 1,50,000
Debt = Rs 8,00,000
Cost of debt = 8%
Capitalization rate = 12%
Using the NOI approach, we can calculate the value of the firm and the cost of equity as follows:
1. Calculation of Firm Value
The formula to calculate the value of the firm using the NOI approach is:
Firm value = Net operating income / Capitalization rate
Net operating income (NOI) can be calculated as:
NOI = EBIT - Interest expense
= EBIT - (Debt x Cost of debt)
= 1,50,000 - (8,00,000 x 8%)
= Rs 86,000
Using the above values, we can calculate the firm value as:
Firm value = 86,000 / 12%
= Rs 7,16,667
2. Calculation of Cost of Equity
The formula to calculate the cost of equity using the NOI approach is:
Cost of equity = Net operating income / Equity value
Equity value can be calculated as:
Equity value = Firm value - Debt
= 7,16,667 - 8,00,000
= Rs -83,333 (Negative value indicates that the company has negative equity)
Using the above values, we cannot calculate the cost of equity as the equity value is negative.
Effect of Change in Debenture Debt
1. Increase in Debenture Debt to Rs 10,00,000
If the debenture debt is increased to Rs 10,00,000, the new debt value would be:
Debt = Rs 8,00,000 + Rs 2,00,000
= Rs 10,00,000
Using the same calculation formulae as above, we can calculate the new firm value and cost of equity as follows:
- Firm value = 71,667
- Cost of equity = -16.67%
The increase in debenture debt has decreased the value of the firm and increased the cost of equity.
2. Decrease in Debenture Debt to Rs 5,00,000
If the debenture debt is decreased to Rs 5,00,000, the new debt value would be:
Debt = Rs 8,00,000 - Rs 3,00,000
= Rs 5,00,000
Using the same calculation formulae as above, we can calculate the new firm value and cost of equity as follows:
- Firm value = 1,33,333
- Cost of equity = -33.33%
The decrease in debenture debt has increased the value of the firm and decreased the cost of equity.
Given:
EBIT = Rs 1,50,000
Debt = Rs 8,00,000
Cost of debt = 8%
Capitalization rate = 12%
Using the NOI approach, we can calculate the value of the firm and the cost of equity as follows:
1. Calculation of Firm Value
The formula to calculate the value of the firm using the NOI approach is:
Firm value = Net operating income / Capitalization rate
Net operating income (NOI) can be calculated as:
NOI = EBIT - Interest expense
= EBIT - (Debt x Cost of debt)
= 1,50,000 - (8,00,000 x 8%)
= Rs 86,000
Using the above values, we can calculate the firm value as:
Firm value = 86,000 / 12%
= Rs 7,16,667
2. Calculation of Cost of Equity
The formula to calculate the cost of equity using the NOI approach is:
Cost of equity = Net operating income / Equity value
Equity value can be calculated as:
Equity value = Firm value - Debt
= 7,16,667 - 8,00,000
= Rs -83,333 (Negative value indicates that the company has negative equity)
Using the above values, we cannot calculate the cost of equity as the equity value is negative.
Effect of Change in Debenture Debt
1. Increase in Debenture Debt to Rs 10,00,000
If the debenture debt is increased to Rs 10,00,000, the new debt value would be:
Debt = Rs 8,00,000 + Rs 2,00,000
= Rs 10,00,000
Using the same calculation formulae as above, we can calculate the new firm value and cost of equity as follows:
- Firm value = 71,667
- Cost of equity = -16.67%
The increase in debenture debt has decreased the value of the firm and increased the cost of equity.
2. Decrease in Debenture Debt to Rs 5,00,000
If the debenture debt is decreased to Rs 5,00,000, the new debt value would be:
Debt = Rs 8,00,000 - Rs 3,00,000
= Rs 5,00,000
Using the same calculation formulae as above, we can calculate the new firm value and cost of equity as follows:
- Firm value = 1,33,333
- Cost of equity = -33.33%
The decrease in debenture debt has increased the value of the firm and decreased the cost of equity.
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Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.?
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Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.?.
Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.?.
Solutions for Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? in English & in Hindi are available as part of our courses for B Com.
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Here you can find the meaning of Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? defined & explained in the simplest way possible. Besides giving the explanation of
Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.?, a detailed solution for Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? has been provided alongside types of Question 3. A company expects EBIT of Rs 1,50,000. It's debt amount to Rs. 8,00,000; and its cost of debt is 8%. The overall capitalisation rate is 12%. You are required to calculate the value of the firm and the cost of equity according to NOI approach. What will be the effect on the value of the firm and equity capitalisation rate if if the debenture debt is increased to Rs 10,00,000.and what if decreased to Rs 5,00,000.? theory, EduRev gives you an
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