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BRILLIANT’S Capital Structure Theories 341

Solution: (Amount in `)

Particulars Firm X Firm Y Firm Z Firm W

EBIT 2,00,000 3,00,000 5,00,000 6,00,000
Less: Interest (given) 20,000 60,000 2,00,000 2,40,000
NI (Net Income available
to the shareholders) 1,80,000 2,40,000 3,00,000 3,60,000
Equity Capitalization Rate (K ) 12% 16% 15% 18%
e
Market value of Equity
Shares (S) (NI / K ) 15,00,000 15,00,000 20,00,000 20,00,000
e
Market value of debt (B)* 2,00,000 6,00,000 20,00,000 24,00,000
Total value of the firm
V = S + B 17,00,000 21,00,000 40,00,000 44,00,000
Overall cost of capital i.e., K =
o
EBIT/V 11.76% 14.29% 12.5% 13.64%

*Note: As the rate of interest is 10% and the amount of interest is known, the amount of debt
capital can be calculated as:

100
Amount of Interest ×
10
Illustration 4.2.2
(a) A company expects a net income of ` 80,000. It has ` 2,00,000, 8% Debentures. The equity
capitalization rate of the company is 10%. Calculate the value of the firm and overall
capitalization rate according to Net Income Approach (ignoring income-tax).
EH$ H§$nZr < 80,000 ZoQ> B§H$‘ H$s Anojm H$aVr h¡& BgHo$ nmg < 2,00,000, 8% {S>~|Mg© h¢& H§$nZr H$m

B{³dQ>r H¡${nQ>bmBOoeZ aoQ> 10% h¡& ZoQ> B§H$‘ En«moM Ho$ AZwgma g§ñWm Ho$ ‘yë¶ VWm g§nyU© H¡${nQ>bmBOoeZ
aoQ> H$s JUZm H$s{OE (B§H$‘ Q>¡³g H$s AdhobZm H$s{OE)&
(b) If the debenture is increased to ` 3,00,000, what shall be the value of the firm.
¶{X {S>~|Ma H$mo ` 3,00,000 VH$ ~‹T>m¶m OmVm h¡, ’$‘© H$m ‘yë¶ ³¶m hmoJm&
Solution:
(a) Calculation of the Value of the Firm
(`)
Net Income 80,000
Less: Interest on 8% Debenture of ` 2,00,000 16,000
Earnings available to equity shareholders 64,000