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

Rohini Exports Ltd has EBIT of ₹6,00,000 and 10% debentures of ₹12,00,000. The equity capitalisation rate is 15% and, as per the Net Income approach, it stays constant whatever the debt level. What is the total value of the firm?

The firm's value is ₹44,00,000. Under the Net Income approach, equity is earnings after interest of ₹4,80,000 capitalised at 15%, giving ₹32,00,000, and adding the debt of ₹12,00,000 gives the total firm value.

  1. A₹44,00,000Correct
  2. B₹40,00,000
  3. C₹32,00,000
  4. D₹20,00,000

Explanation

Interest = 10% × 12,00,000 = ₹1,20,000, so earnings for equity = 6,00,000 − 1,20,000 = ₹4,80,000. Equity value = 4,80,000 / 0.15 = ₹32,00,000. Firm value = 32,00,000 + 12,00,000 = ₹44,00,000. Capitalising whole EBIT at 15% (₹40,00,000) ignores the cheaper debt.

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