CA Inter P6 · Chapter 5 · Question 1 of 9
Under the Net Income (NI) approach, a firm has EBIT of ₹ 6,00,000, 10% debt of ₹ 20,00,000 and a cost of equity of 15%. There are no taxes. The total value of the firm is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) ₹ 46,66,667
Explanation
Net income to equity = EBIT - interest = ₹ 6,00,000 - ₹ 2,00,000 = ₹ 4,00,000. Value of equity S = ₹ 4,00,000 / 0.15 = ₹ 26,66,667. Value of firm V = S + D = ₹ 26,66,667 + ₹ 20,00,000 = ₹ 46,66,667. Overall cost of capital = ₹ 6,00,000 / ₹ 46,66,667 = 12.86%.
More Financing Decisions – Capital Structure MCQs
- Q3According to Modigliani and Miller (with corporate taxes), an unlevered firm is valued at ₹ 50 crore. An otherwise identical firm has ₹ 20…
- Q4Swastik Ltd needs ₹ 50 lakh for a new venture. Plan I: issue 5,00,000 equity shares of ₹ 10 each. Plan II: issue ₹ 20 lakh of 12%…
- Q5According to the Traditional approach to capital structure:
- Q6Under Modigliani-Miller Proposition II (no taxes), a firm has an overall cost of capital of 12%, a cost of debt of 8% and a debt-equity…
- Q7According to the pecking order theory of capital structure, the order in which a firm prefers to raise funds is: