Section 19.

2: Illustration of Net Income Approach

(Rs.in million)
Firm A Firm B
Net operating income 10,000 10,000
Interest on debt 0 3,000
Cost of debt 6% 6%
Cost of equity 10% 10%
Market value of debt 0 50,000
Market value of equity 100,000 70,000
Average cost of capital 10% 8.3%

Illustration of tax advantage of a rupee

tc 50%
tps 5%
tpd 30%
Tax advantage of a rupee of debt( in rupees) 0.32