Multiple choice

ABC Ltd. is expecting an annual EBIT of Rs. 80,000. The company has 3 lakhs in 10% debentures. The cost of equity capital is 12.5%.

Calculate the total value of firm as per net income approach.

  1. 2 lakhs

  2. 7 lakhs

  3. 10 lakhs

  4. 380,000

  5. None of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

EBIT- 80,000 Int. on debentures - 30,000 (3 lakhs * 10%) Earning of equity - 50,000 Market value of equity - 400,000 (50,000 * 100/12.5) Market value of firm is 700,000 (400,000 + 300,000).

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