IPL Ltd. has EBIT of Rs.1,00,000. The company makes use of debt and equity capital. The firm has 10% debentures of Rs.5,00,000 and the firm’s equity capitalization rate is 15%. You are required to compute: (i) Current value of the firm; (ii) Overall cost of capital.
From the following information answer next 4 questions.
Alpha Ltd. & Beta Ltd. are identical except for capital structures. Alpha has 50% debt and 50% equity, whereas Beta has 20% debt and 80% equity. All percentages are in market-value terms. The borrowing rate for both companies is 8% in a no-tax world, and capital markets are assumed to be perfect. Both companies have net operating income of Rs.3,60,000 and the overall capitalization rate of the company, K0 is 18%.
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