Scribd
Upload
36 views

Problems On Capital Structure

Uploaded by

itsbrightonwright
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
36 views

Problems On Capital Structure

Uploaded by

itsbrightonwright
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Problems on Capital Structure

1. A Company's expected annual net operating income (BIT) is Rs. 50,000. The
company has Rs. 2,00,000, 10% debentures. The equity capitalization rate (Ke) of
the company is 12.5 per cent. Calculate the value of the firm and overall cost of
capital.
2. Mahima Limited has a net operating income of Rs. 3,00,000. Mahima employs Rs.
10,00,000 of debt capital carrying 10 per cent interest charge. The equity
capitalization rate applicable to Mahima is 15 per cent. What is the market value of
Mahima under the Net Income method?
3. A Company's expected annual net operating income (BIT) is Rs. 1,00,000. The
company has Rs. 4,00,000, 10% debentures. The equity capitalization rate (Ke) of
the company is 12.5 per cent. Calculate the value of the firm and overall cost of
capital. If the firm has decided to raise the amount of debentures by Rs. 2,00,000
and use proceeds to retire the equity shares. Calculate the new value of the firm and
overall cost of capital.
4. The following information is available for Avinash Metals:
Net operating Rs. 4,00,000
income
Interest on debt Rs. 1,00,000
Cost of equity 18%
Cost of debt 12%
 What is the average cost of capital of Avinash?
 What happens to the average cost of capital of Avinash, if it employs Rs.
10,00,000 of debt to finance a project which earns an operating income of Rs.
2,00,000? Assume the net operating income (NOI) method applies and there
are no taxes.

5. The following information is available for two firms A and B:


Particulars A B
Net operating 20,00,00 20,00,000
income 0
Interest on debt -- 5,00,000
Cost of equity 15% 15%
Cost of debt 10% 10%

Calculate the market value of the equity, market value of debt and market value of the firm
for A and B Limited.

6. A firm has EBIT of Rs. 40,000, the firm has 10 per cent debentures of Rs. 1,00,000 an
its current equity capitalization rate is 16 per cent. find:
The market value of equity
The market value of debt
The total market value of firm
The overall cost of capital

7. Assume the company's operating income is Rs. 50,000. Cost of debt is 10% and has
Rs, 2,00,000 as outstanding debt. If the overall cost of capital is 12.5 per cent, what
would be the total value of the firm and the equity capitalization rate?

8. Assume the company's operating income is Rs. 1,00,000. Cost of debt is 10% and has
Rs, 4,00,000 as outstanding debt. If the overall cost of capital is 12.5 per cent, what
would be the total value of the firm and the equity capitalization rate? In case if the
firm increases the amount of debt from Rs. 4,00,000 to Rs. 6,00,000 and uses the
proceeds of the debt to repurchase equity shares and decreases the amount of debt
from Rs. 4,00,000 to Rs. 2,00,000, what would be the total value of the firm and the
equity capitalization rate?

9. Company X and Company Y are in the same risk class, and are identical in every
respect except that company X and uses debt, while company Y does not. The
levered firm has Rs. 9,00,000 debentures, carrying 10 per cent rate of interest. Both
the firms earn 20 per cent operating profit on their total assets of Rs. 15,00,000.
Assume perfect capital markets, rational investors and so on; a tax rate of 35 per
cent and capitalization rate of 15 per cent for an all-equity company.
a. Compute the value of firms X and Y using the Net Income (NI) Approach.
b. Compute the value of each firm using the Net Operating Income (NOI)
Approach.
c. Using the NOI Approach, calculate the overall cost of capital for firms X and Y.
d. Which of these two firms has an optimal capital structure according to the
NOI Approach? Why?

You might also like