The expected EBIT of a firm is Rs. 2,00,000.

It has
issued equity share capital with Ke @ 10% and 6 %
debt of Rs.5,00,000. Find out the value of the firm and
the overall cost of Capital, WACC.

EBIT 200000
ke 10%
kd 6%
value of debt 500000
intrest 30000
EBIT-INTREST 170000
VALUE OF EQU 1700000
VALUE OF FIRM 2200000
KO 9.09%
Their ke and kd are same at 20% and 12%
respectively and earn same amount of EBIT of
Rs.6,00,000 p.a. However, these firms differ with
respect of amount of debt financing. While Firm A
is an unlevered firm (all-equity), other firms have
12% Debt of 5,00,000, 10,00,000 and 15,00,000
respectively. Find out their values and ko, under
NI Approach. A B
EBIT 600000 600000
VALUE OF DEBT 0 500000
KD 12% 12%
KE 20% 20%
INTREST 0 60000
EBIT-INTREST 600000 540000
VALUE OF EQUIT 3000000 2700000
VALUE OF FIRM 3000000 3200000
KO 20.00% 18.75%
C D
600000 600000
1000000 1500000
12% 12%
20% 20%
120000 180000
480000 420000
2400000 2100000
3400000 3600000
17.65% 16.67%
Four firms A, B, C and D are operating in the same
competitive environment and belong to same risk
class which has overall cost of capital of 20%. Firm
A is an unlevered one whereas other firms have
borrowed Rs. 4,00,000, Rs.10,00,000 and
Rs.16,00,000 at 15%. All the firms are earning
EBIT of 8,00,000. Find out their values as per NOI.

A B
EBIT 800000 800000
NOI Net Operating Income value of debt 0 400000
interest 0 60000
EBIT-Interest 800000 740000
ko 20% 20%
Value of the Fir 4000000 4000000
Value of Equity 4000000 3600000
Ke 20.00% 20.56%
C D
800000 800000
1000000 1600000
150000 240000
650000 560000
20% 20%
4000000 4000000
3000000 2400000
21.67% 23.33%
A firm has an EBIT of Rs.2,00,000 and belongs
to a risk class of 10%. What is the value of
cost of equity capital if it employees 6% debt
to the extent of 30%, 40% or 50% of the total
capital fund of 10,00,000. TOTAL CAPITAL 1000000 1000000
INTREST 6% 6%
30% 40%
EBIT 200000 200000
INTREST 18000 24000
EBIT-INTREST 182000 176000
VALUE OF FIRM 1820000 1760000
DEBT 300000 400000
equity 700000 600000
value of debt 1520000 1360000
ke 11.97% 12.94%
1000000
6%
50%
200000
30000
170000
1700000
500000
500000
1200000
14.17%
ABC Ltd. having an EBIT of 1,50,000 is
contemplating to redeem a part of the capital by
introducing debt financing. Presently, it is a 100 %
equity firm with equity capitalization rate ke, of EBIT 150000
16%. The firm is to redeem the capital by be EQUITY 100%
introducing debt financing up to 3,00,000 i.e., 30% KE 16%
of total funds or up to 5,00,000 i.e., 50% of total
TOTAL CAPITAL 500000
funds. It is expected that for the debt financing up
to 30%, the rate of interest will be 10% and the ke 30%
will increase to 17%. However, if the firm opts for EBIT 150000
50% debt financing, then the interest will be KE 17%
payable at the rate of 12% and the ke will be 20%.
Find out the value of the firm and its WACC under KD 10%
be different levels of debt financing. VALUE OF DEB 300000
INTREST 30000
EBIT-INTREST 120000
VALUE OF EQU 700000
VALUE OF FIRM 1000000
KO 14.90%
 50%
150000
20%
12%
500000
60000
90000
500000
1000000
16.00%