Calculate cost of equity and market value of a firm for the following data: Earnings before interest and taxes = Rs.435000/- Total capital (Book value) = Rs.3500000 Borrowed at 10% WACC = 12%

Solution

The solution is as follows −

Debt ratio	Equity	Debt	Cost of debt	WACC	Interest Expenses (I)	Market value of a company (V)	Market value of Equity (E)	Net operating income (EBIT – I)	Cost of equity (Ke)

0.00	3500000	0	10%	11.5%	0	3625000	362500	3625000	10%
0.20	2800000	700000	10%	11.5%	70000	3625000	292500	3555000	8.07%
0.45	1925000	1575000	10%	11.5%	157500	3625000	205000	3467500	5.65%
0.70	2450000	2450000	10%	11.5%	245000	3625000	117500	3380000	3.24%
1.00	0	3500000	10%	11.5%	350000	3625000	12500	3275000	0.35%

Equity = book value * (1-debt ratio)

Debt = book value * debt ratio

Interest (I) = debt * cost of borrowed

Market value of a company (V) = EBIT/WACC

Market value of equity (E) = V – I

Cost of equity = E/V

Published on 28-Sep-2020 14:50:28