Skip to content

CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure

Meera Textiles has EBIT of ₹6,00,000 and 10% debentures of ₹10,00,000 outstanding. Its equity capitalisation rate is 15%. Using the Net Income approach, what is the total value of the firm (value of equity plus value of debt)?

Interest is ₹1,00,000, so earnings available to equity are ₹5,00,000. Capitalised at 15% this gives equity value of ₹33,33,333. Adding debt of ₹10,00,000 gives a firm value of ₹43,33,333 under the Net Income approach.

  1. A₹40,00,000
  2. B₹43,33,333
  3. C₹46,66,667Correct
  4. D₹50,00,000

Explanation

Interest = 10% of 10,00,000 = ₹1,00,000. Earnings for equity = 6,00,000 - 1,00,000 = ₹5,00,000. Equity value = 5,00,000/0.15 = ₹33,33,333. Firm value = 33,33,333 + 10,00,000 = ₹43,33,333. Option C is wrong; wait, correct is 43,33,333 which is option B.

Did you get it right without looking?

One question tells you little. A timed set on Financing Decisions - Capital Structure shows your real accuracy, how long you take and where you lose marks.

Practise Financing Decisions - Capital StructureFree diagnostic mock

More Financing Decisions - Capital Structure questions