Q. Computation of Value of the Firm?

Computation of Value of the Firm (V) & Overall Cost of Capital:-

NI                    = EBIT - Interest

= 50,000 - 20,000 = 30,000

10

Interest = 2, 00,000 x 100/ NI= 20,000

Value of Equity (S) =NI / K = 30,000 / 12.5 % =  30,000 /12.5 e  X 100 = 2, 40,000

Value of Debt             = 2, 00,000

Value of Equity          = 2, 40,000

Value of the Firm = S + B = 2, 40,000 + 2, 00,000 = 4, 40,000

Calculation of Overall Cost of Capital:-

K_o = (EBIT / V)  X 100         = (50,000 / 4, 40,000) X 100 = 11.36%

Value of the Firm                    = 4, 40,000

Overall Cost of Capital           = 11.36%