Page 346 - Corporate Finance PDF Final new link

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346 Corporate Finance BRILLIANT’S

Solution:
In the above debt equity mix, the % of debt is varying from 0 to 60%. The % of equity would
be calculated by deducting % of debt from 100.
% of Debt W % of Equity W
1 2
0% 0 100 – 0 = 100% 1
10% 0.10 100 – 10 = 90% 0.90
20% 0.20 100 – 20 = 80% 0.80
30% 0.30 100 – 30 = 70% 0.70
40% 0.40 100 – 40 = 60% 0.60
50% 0.50 100 – 50 = 50% 0.50
60% 0.60 100 – 60 = 40% 0.40

K = K W + K W
o d 1 e 2
1. 0.05 × 0 + 0.12 × 1 = 0.12 or 12% 5. 0.06 × 0.40 + 0.14 × 0.6 = 0.108 or 10.8%
2. 0.05 × 0.10 + 0.12 × 0.9 = 0.113 or 11.3% 6. 0.065 × 0.50 + 0.16 × 0.5 = 0.1125 or 11.25%
3. 0.05 × 0.20 + 0.125 × 0.8 = 0.11 or 11% 7. 0.07 × 0.60 + 0.20 × 0.4 = 0.122 or 12.2%
4. 0.055 × 0.30 + 0.13 × 0.7 = 0.1075 or 10.75%
The calculated values of K shows that overall cost of capital is minimum at the point where
o
debt-equity mix is 30% and 70%, respectively.
Since the optimal debt equity mix for a company is that where overall cost of capital (K ) is
o
lowest. So, the firm should use 30% debt and 70% equity in its capital structure where the K
o
would be 10.75%.

Q.35. Write a short note on Net Operating Income approach.
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OR
How can the value of firm be derived by Net Operating Income approach? Explain.
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Net Operating Income (NOI) Approach ZoQ> Am°naoqQ>J BÝH$‘ (NOI) H$s AdYmaUm
This approach was also suggested by `h AdYmaUm ^r S²>`yaÝS> Zo gOoñQ> H$s WrŸ& `h ZoQ>
Durand. The Net Operating Income (NOI) ap- BÝH$‘ H$s AdYmaUm H$s {~ëHw$b {dnarV h¡Ÿ& Bg AdYmaUm
proach is just opposite to the NI approach.
According to this approach, the capital struc- Ho$ AZwgma, {H$gr \$_© H$s H¡${nQ>b ñQ´>³Ma Aàmg§{JH$ h¡Ÿ&
ture decision of a firm is irrelevant. Any S>oãQ> Ed§ Bp³dQ>r Ho$ H$m°på~ZoeZ _| n[adV©Z H$aZo go H¡${nQ>b
changes in combination of debt and equity will H$s Q>moQ>b H$m°ñQ> Ed§ \$_© H$s Hw$b d¡ë`y na H$moB© à^md Zht
not change the total value of the firm and the
overall cost of capital is independent of the n‹S>Vm VWm dh brdaoO H$s _mÌm go Aà^m{dV ahVr h¡Ÿ&
degree of leverage.