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Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (?
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Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs ...
Solution:
Calculation of Value of the firm and overall capitalisation rate according to Net Income approach:
- Value of the firm = EBIT / Capitalisation rate
- Given, EBIT = Rs 3,00,000 and equity capitalisation rate = 12%
- So, Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Overall capitalisation rate = (EBIT - Interest) / Value of the firm
- Interest = 9% of Rs 12,00,000 = Rs 1,08,000
- So, Overall capitalisation rate = (3,00,000 - 1,08,000) / 25,00,000 = 0.4768 or 47.68%
Effect of increase in debenture debt on Value of the firm and overall capitalisation rate:
- New debenture debt = Rs 15,00,000
- Value of the firm = EBIT / Capitalisation rate
- Interest = 9% of Rs 15,00,000 = Rs 1,35,000
- EBIT remains the same at Rs 3,00,000
- So, Capitalisation rate = (EBIT - Interest) / Value of the firm
- Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Capitalisation rate = (3,00,000 - 1,35,000) / 25,00,000 = 0.546 or 54.6%
Effect of decrease in debenture debt on Value of the firm and overall capitalisation rate:
- New debenture debt = Rs 10,00,000
- Value of the firm = EBIT / Capitalisation rate
- Interest = 9% of Rs 10,00,000 = Rs 90,000
- EBIT remains the same at Rs 3,00,000
- So, Capitalisation rate = (EBIT - Interest) / Value of the firm
- Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Capitalisation rate = (3,00,000 - 90,000) / 25,00,000 = 0.804 or 80.4%
Conclusion:
- As the debenture debt is increased, the overall capitalisation rate also increases.
- As the debenture debt is decreased, the overall capitalisation rate also decreases.
- The value of the firm remains the same, as EBIT is constant.
Calculation of Value of the firm and overall capitalisation rate according to Net Income approach:
- Value of the firm = EBIT / Capitalisation rate
- Given, EBIT = Rs 3,00,000 and equity capitalisation rate = 12%
- So, Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Overall capitalisation rate = (EBIT - Interest) / Value of the firm
- Interest = 9% of Rs 12,00,000 = Rs 1,08,000
- So, Overall capitalisation rate = (3,00,000 - 1,08,000) / 25,00,000 = 0.4768 or 47.68%
Effect of increase in debenture debt on Value of the firm and overall capitalisation rate:
- New debenture debt = Rs 15,00,000
- Value of the firm = EBIT / Capitalisation rate
- Interest = 9% of Rs 15,00,000 = Rs 1,35,000
- EBIT remains the same at Rs 3,00,000
- So, Capitalisation rate = (EBIT - Interest) / Value of the firm
- Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Capitalisation rate = (3,00,000 - 1,35,000) / 25,00,000 = 0.546 or 54.6%
Effect of decrease in debenture debt on Value of the firm and overall capitalisation rate:
- New debenture debt = Rs 10,00,000
- Value of the firm = EBIT / Capitalisation rate
- Interest = 9% of Rs 10,00,000 = Rs 90,000
- EBIT remains the same at Rs 3,00,000
- So, Capitalisation rate = (EBIT - Interest) / Value of the firm
- Value of the firm = 3,00,000 / 0.12 = Rs 25,00,000
- Capitalisation rate = (3,00,000 - 90,000) / 25,00,000 = 0.804 or 80.4%
Conclusion:
- As the debenture debt is increased, the overall capitalisation rate also increases.
- As the debenture debt is decreased, the overall capitalisation rate also decreases.
- The value of the firm remains the same, as EBIT is constant.
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Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (?
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Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? 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 Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (?.
Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? 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 Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (?.
Solutions for Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? in English & in Hindi are available as part of our courses for B Com.
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Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (?, a detailed solution for Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? has been provided alongside types of Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? theory, EduRev gives you an
ample number of questions to practice Company’s expected operating income ( EBIT) is Rs 3,00,000. It has Rs 12,00,000 , 9% debentures. The equity capitalisation rate of the company is 12%. Calculate the value of the firm and overall capitalisation rate according to Net Income approach. If the debenture debt is increased to Rs 15,00,000 what shall be the value of the firm and overall capitalisation rate? If the debenture debt is decreased to Rs 10,00,000, what shall be the value of the firm and overall capitalisation rate? (? tests, examples and also practice B Com tests.
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