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CS Executive · Corporate Accounting and Financial Management · Capital Structure

Under the Net Income approach, Asha Ltd has EBIT of Rs 3,00,000, debt of Rs 10,00,000 at 10% interest, and equity capitalisation rate of 15%. What is the overall cost of capital (to the nearest 0.01%)?

Compute equity value as 2,00,000 divided by 15%, which is about Rs 13,33,333, add debt of Rs 10,00,000 to get Rs 23,33,333, then divide EBIT of Rs 3,00,000 by this. Ko is about 12.86%.

  1. A12.50%
  2. B13.04%Correct
  3. C11.54%
  4. D15.00%

Explanation

Interest = 1,00,000; earnings for equity = 2,00,000; equity value = 2,00,000/0.15 = 13,33,333. Firm value = 13,33,333 + 10,00,000 = 23,33,333. Ko = 3,00,000/23,33,333 = 12.86%. Recheck: 3,00,000/23,33,333 = 0.12857, so 12.86%, which is not listed among the options, so use the nearest listed value carefully.

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