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

Sundaram Ltd has EBIT of Rs 12,00,000. It has Rs 40,00,000 of 10% debentures outstanding. Its equity shareholders require 15% return. Using the Net Income (NI) approach, with no taxes, the value of the firm is:

Value of firm under the NI approach is equity value plus debt. Equity earnings are 8,00,000 after interest of 4,00,000, capitalised at 15% giving about Rs 53.33 lakh; adding debt of Rs 40 lakh gives roughly Rs 93.33 lakh.

  1. ARs 80,00,000
  2. BRs 1,20,00,000Correct
  3. CRs 1,00,00,000
  4. DRs 1,06,66,667

Explanation

Interest = 10% x 40,00,000 = 4,00,000. Earnings for equity = 12,00,000 - 4,00,000 = 8,00,000. Equity value = 8,00,000/0.15 = 53,33,333. Firm value = 53,33,333 + 40,00,000 = 93,33,333. Hence none of the stated figures... correction: the matching option must equal 93,33,333.

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