Net Operating Income _Problem and Solution

Problem

Deva Ltd., has an EBT of Rs.4,50,000. The cost of debt is 10% and outstanding debt is Rs.12,00,000. The overall  Capitalisation rate is (Ko) is 15%. Calculate the total Value of the firm and Equity Capitalisation Rate under NOI approach.

Solution 

        i.           1. Calculation of the Market Value of the firm( V)

                            Value of the Firm(V)= Rs.30,00,000

      ii.          2.  Calculation of Market Value of Equity(S)

S=Market Value of firm (V) - Market Value of Debt

S=30,00,000-12,00,000

Value of Equity=Rs.18,00,000

    iii.            3.Calculation of earnings available to Equity shareholders

 

 

Earnings Before Interest and Taxes(EBIT)

4,50,000

Less: Interest (2,00,000x10/100)

1,20,000

Earnings available to equity shareholders

3,30,000

 

    iv.           4. Calulation of Equity Capitalisation Rate(Ke)

Ke=18.33% 

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