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BRILLIANT’S Capital Structure Theories 345

Solution:
Statement showing the value of firm (Amount in `)

Particulars (i) (ii) (iii) (iv) (v) (vi) (vii)
Debt (`) Nil 1,00,000 2,00,000 3,00,000 4,00,000 5,00,000 6,00,000
k 10% 10% 10.5% 11% 12% 14% 17%
i
EBIT 2,50,000 2,50,000 2,50,000 2,50,000 2,50,000 2,50,000 2,50,000
Less: Interest Nil 10,000 21,000 33,000 48,000 70,000 1,02,000
PBT 2,50,000 2,40,000 2,29,000 2,17,000 2,02,000 1,80,000 1,48,000
Less: Tax @ 50% 1,25,000 1,20,000 1,14,500 1,08,500 1,01,000 90,000 74,000
PAT 1,25,000 1,20,000 1,14,500 1,08,500 1,01,000 90,000 74,000
(÷)k × 100 20% 12.5% 13.0% 12.5% 13.5% 15.5% 20.0%
e
Value of Equity 6,25,000 9,60,000 8,80,769 8,68,000 7,48,148 5,80,645 3,70,000
Add: Market value of Debt Nil 1,00,000 2,00,000 3,00,000 4,00,000 5,00,000 6,00,000
6,25,000 10,60,000 10,80,769 11,68,000 11,48,148 10,80,645
Value of Firm NPP 9,70,000
Conclusion: The company should use debt of ` 3,00,000 in its capital for its capital structure
to maximize the value of firm.
Illustration 4.2.6
The following estimates of the cost of debt and cost of equity capital have been made at
various levels of the debt-equity mix for ABC Ltd:
S>oãQ> H$s H$m°ñQ> VWm B{³dQ>r H¡${nQ>b H$s H$m°ñQ> Ho$ {ZåZ{b{IV AZw‘mZ, ABC [b{‘Q>oS> Ho$ {bE S>oãQ> B{³dQ>r {‘³g
Ho$ {d{^ÝZ ñVam| na {H$¶o J¶o h¢…

% of Debt Cost of Debt Cost of Equity
(S>oãQ> H$m à{VeV) (S>oãQ> H$s H$m°ñQ>) (Bp³dQ>r H$s H$m°ñQ>)

0 5.0% 12.0%
10 5.0% 12.0%
20 5.0% 12.5%
30 5.5% 13.0%
40 6.0% 14.0%
50 6.5% 16.0%
60 7.0% 20.0%

Assuming no tax, determine the optimal debt equity ratio for the company on the basis of the
overall cost of capital, WACC.
‘mZm {H$ H$moB© Q>¡³g Zht h¡, H¡${nQ>b H$s g§nyU© bmJV, WACC Ho$ AmYma na H§$nZr Ho$ {bE AZwHy$b S>oãQ> B{³dQ>r
aoemo H$m {ZYm©aU H$s{OE&