HomeworkLib
Question

Alpha Ltd is expecting an annual Earnings Before Interest and Tax of ₹1,50,000. The company had...

Alpha Ltd is expecting an annual Earnings Before Interest and Tax of ₹1,50,000. The company had 10% debentures of ₹ 5 Lakhs. Calculate the overall cost of capital of the firm if the cost of Equity is 12% assuming NI approach in the calculation. Suggest what happens to the value of the firm when more debentures are issued.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Net income approach suggests that value of firm can be increased by decreasing the overall cost of capital through higher debt proportion.

EBIT 150000 Less : Interest cost 50000 (500000*10%) = 100000 i.e Earnings after tax

Market value of equity shares = Earnings after tax÷ Cost of equity. i.e 100000/12% = 833333.33

Market value of debt = 500000

Total Market value of firm = 1333333.33

Overall cost of capital in percentage = EBIT÷ Total Market value of firm =150000÷ 1333333.33 = 11.25%

When more debentures are issued the value of firm will initially increase upto a certain thereafter it will start falling.Since higher interest payment and return of shareholders ultimately affects the debt financing.

0 0
Add a comment
Know the answer?
Add Answer to:
Alpha Ltd is expecting an annual Earnings Before Interest and Tax of ₹1,50,000. The company had...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Dart Industries has earnings before interest and taxes of $800,000 and a corporate tax rate of...

    Dart Industries has earnings before interest and taxes of $800,000 and a corporate tax rate of 40 percent. The firm’s before-tax cost of debt is 10 percent, and its cost of equity in the absence of borrowing is 15 percent. According to the Modigliani and Miller approach to capital structure with corporate taxes, what is the total market value of Dart industries with no leverage assuming that the company earnings will remain constant in the future?

  • Brand Corp. is currently unlevered. The firm has $960,000 in earnings before interest and taxes (EBIT)...

    Brand Corp. is currently unlevered. The firm has $960,000 in earnings before interest and taxes (EBIT) and the unlevered cost of capital is 12%. The firm wants to issue $1,600,000 in debt to repurchase stock. The perpetual bonds have a 5% yield. The tax rate is 25%. Find the value of the levered firm (Vl). For the levered firm, find the cost of equity.    Unless stated otherwise, compounding is annual and payments occur at the end of the period.

  • General Electronics produces electronic communications equipments. In 2014 the company had Tk. 200,000 earnings before interest...

    General Electronics produces electronic communications equipments. In 2014 the company had Tk. 200,000 earnings before interest and taxes. On January 1, 2014 the company borrowed Tk. 400,000 at a rate of interest of 10 percent. The company had no previous debt and its tax rate is 40 percent. 1.What was the degree of financial leverage prior to 2014? 2.What was the 2014 degree of financial leverage using the actual earnings figures? 3.In 2014 what percentage change in after tax earnings...

  • Calculation of FCFE A company has the following information: $ 80.00 Earnings before interest and taxes...

    Calculation of FCFE A company has the following information: $ 80.00 Earnings before interest and taxes Interest expense $ 6.00 Tax rate 40% Net change in debt 10.00 Investment in total capital $ 8.00 What is its free cash flow to equity? Do not round intermediate calculations. Round your answer to the nearest cent. $ tA

  • AT&T Inc. had the EBIT (earnings before interest and tax) of $31,618 million, interest expense of...

    AT&T Inc. had the EBIT (earnings before interest and tax) of $31,618 million, interest expense of $7,959 million, and the tax expense of $4,920 million. Its current share price is $30.99 per share. It has 7,280 million shares outstanding. Compute its current Price-Earnings (P/E) ratio,

  • Problem 19.5.2 Question Help Debtfree Plc, an all-equity financed company, has annual earnings of £119m before...

    Problem 19.5.2 Question Help Debtfree Plc, an all-equity financed company, has annual earnings of £119m before tax per year, which are expected to remain stable in the future. The cost of the firm's capital is 10%, and the corporate tax rate is 35%. Debty Plc is in all respects a similar company to Debtfree Plc, but its capital structure includes £251 m of bonds. The value of the ungeared firm is £ 773.5 m. (round to one decimal place) The...

  • Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit...

    Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit before interest and tax (EBIT) is expected to be either $50,000 during a recession, $150,000 during normal times, and $300,000 in an expansion period. "Boats" is considering issuing $500K debt at 4% interest. With the amount raised, the company intends to buy back shares from the public. There are currently 50,000 shares outstanding. Ignore taxes and assume that EPS is paid as a dividend...

  • VVVs Coffee has expected earnings before interest and taxes of $34,500, an unlevered cost of capital...

    VVVs Coffee has expected earnings before interest and taxes of $34,500, an unlevered cost of capital of 14%, and debt with both a book and face value of $20,000. The debt has an annual 7% coupon. The tax rate is 35%. What is the value of the firm?

  • Cost of goods sold Depreciation expense Earnings after taxes Earnings before taxes Earnings before taxes Interest...

    Cost of goods sold Depreciation expense Earnings after taxes Earnings before taxes Earnings before taxes Interest expense Sales Selling and administrative expense Taxes value: 20.00 points Lemon Auto Wholesalers had sales of $740,000 last year, and cost of goods sold represented 70 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was $18,000 and interest expense for the year was $11,000. The firm's tax rate is 30 percent. a. Compute earnings after taxes. Lemon Auto...

  • Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation,...

    Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 18,000 shares of stock outstanding, currently worth $30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $68,000 and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $78,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT