CS Executive · Corporate Accounting and Financial Management · Capital Structure
Under the Net Operating Income (NOI) approach, a firm has EBIT of Rs 6,00,000 and overall cost of capital of 12%. Its debt is Rs 20,00,000. What is the value of equity?
Value of the firm is EBIT divided by overall cost of capital, which is 6,00,000 divided by 12%, giving Rs 50,00,000. Subtracting debt of Rs 20,00,000 gives equity value of Rs 30,00,000 under the NOI approach.
- ARs 30,00,000Correct
- BRs 50,00,000
- CRs 70,00,000
- DRs 20,00,000
Explanation
Under NOI, firm value V = EBIT / Ko = 6,00,000 / 0.12 = Rs 50,00,000. Equity = V - Debt = 50,00,000 - 20,00,000 = Rs 30,00,000. Rs 50,00,000 is wrong because it is total firm value, not equity.
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