Found 1748 Articles for Growth & Empowerment

SolutionThe solution is explained below −Using the annuity tableRate for 4% for 10 years will be 0.130Annual depreciation charge = 200000 * 0.130 => 26000                    Lease accountDebit sideCredit sideYearYear1To cashTo interest20000080001920001By DepreciationBy Balance c/d260001660001920002To balance b/dTo interest16600066401593602To DepreciationTo balance c/d260001333601593603To balance b/dTo interest13336053341280263To DepreciationTo balance c/d260001020261280264To balance b/dTo interest1020264081979454To DepreciationTo balance c/d2600071945979455To balance b/dTo interest719452878690675To DepreciationTo balance c/d2600043067690676To balance b/d43067Year 1Debit side: Cash – interest => 200000 – (200000*4%) => 200000 – 8000 => 192000Credit side: 192000 – Depreciation amount => 192000 – 26000 => 166000Year 2Debit side: balance – interest ... Read More

Return on investment Operating leverage Financial leverage Combined leverageRs.Sales (S)1000000Variable cost (VC)375000Fixed cost (FC)95000Debt425000Interest on debt10%Equity capital590000SolutionThe solution is given below −return on investment = EBIT/ (D + E) return on investment = (S – VC – FC)/ (D + E) return on investment = (1000000 – 375000 – 95000)/ (425000 + 590000) return on investment = 530000/ 1015000 return on investment = 52.22%operating leverage (OL) = (S – VC)/ EBIT operating leverage = (1000000 – 375000)/ 530000 operating leverage = 625000/ 530000 operating leverage = 1.18financial leverage (FL) =EBIT/ EBT financial leverage = 530000/ (EBIT – I) financial leverage = 530000/ (530000 ... Read More

SolutionThe solution is given below −Interest cost = 12% (250000) = 30000/- Earnings = EBIT – Interest cost = 50000 – 30000 = 20000/- (no tax rate) Shareholders earnings = earnings Shareholders earnings = 20000/- Market value (equity) E = shareholder’s earnings/ cost of equity Market value (equity) E = 20000/16%= 125000 Market value (Debt) D = 250000/- Market value (total) = E + D Market value (total) = 125000 + 250000= 375000/- Cost of capital = EBIT/ market value (total) Cost of capital = 50000/ 37500 = 13.33% Degree of financial leverage ... Read More

Capital structure plays an important role in value of a company. Different companies have different capital structures like some have capital based on debt, some have based on equity and some have a mixed or combination of both in their financial mix.Durand proposed net income approach and he states that change in cost of capital and valuation of company will change, if there a change in financial leverage. Capital structure is relevant to valuation of a firm. Increase in financial leverage leads to increase in weighted average cost of capital (WACC) and value of firm will increase.Market value of equity ... Read More

The major differences between net operating income and net income are as follows −Net operating incomeNo relevance in capital structure.Degree of leverage is irrelevant to cost of capital (assumes).It has constant cost of capital.Equity value is residual.Changes perception of investor with increase in debt.Net incomeRelevance in capital structure.Change in degree of leverage will change WACC (assumes).No taxes.Cost of debt is less than cost of equity.Change in debt will not change perception of investors.

SolutionThe solution is as follows −Debt ratioEquityDebtCost of debtWACCInterest Expenses (I)Market value of a company (V)Market value of Equity (E)Net operating income (EBIT – I)Cost of equity (Ke)0.003500000010%11.5%03625000362500362500010%0.20280000070000010%11.5%70000362500029250035550008.07%0.451925000157500010%11.5%157500362500020500034675005.65%0.702450000245000010%11.5%245000362500011750033800003.24%1.000350000010%11.5%35000036250001250032750000.35%Equity = book value * (1-debt ratio)Debt = book value * debt ratioInterest (I) = debt * cost of borrowedMarket value of a company (V) = EBIT/WACCMarket value of equity (E) = V – ICost of equity = E/V

SolutionThe solution is given below −Value of firm and cost of equity can be calculated by following procedure −Market value of a firm (V) is ratio of earnings before income taxes (EBIT) and weighted average cost of capital (WACC).V = EBIT/WACC V = 95000/12.5% V = 760000Total Equity (E) is difference of market value of a firm (V) and market value of Debt (D).E = V – D E = 760000 – 350000 E = 410000Cost of equity (Ke) is ratio of difference between Earnings per share (EBIT) and interest (I) to market value of equity shareholder’s (Es).Ke= (EBIT-I)/Es Es ... Read More

Capital structure of a company depends on mix or ratio of debt and equity in their mode of their financing. Depending on what company prefer, some may have more debt or more equity in financing their asset, but final goal is to maximize their market value and their profits.Net operating income (NOI) was developed by David Durand. According to net operating income approach, firm value is not affected by change in company or firm’s debt components.Net operating income approach says that value of a firm depends on operating income and associated business risk. Value of firm will not be affected ... Read More

Company XCompany YRsRsNet operating income2000020000Cost of debt02500Net income2000017500Cost of equity0.080.10Market value of shares250000175000Market value of debt050000Total value of firm250000225000Cost of capital (Avg)0.950.08Debt equity ratio00.8Assumptions: 1) no corporate tax 2) equilibrium value is 12%.SolutionThe solution is explained below −Company XCompany YRsRsNet operating income2000020000(-)Cost of debt02500Net income2000017500Equilibrium cost of equity (12.5%)0.1250.125Value of firm160000140000Market value of debt050000Market value if equity16000090000

SolutionThe solution is given below −Company X is unlevered, which means, interest on debt is 0.Company y is levered, which means, interest on debt is 7000 (175000*4%)Market valueCompany XCompany YRsRsNet operating income4500045000Interest on debt070004500038000Profit before taxes4500038000Taxes (40%)18000152002700022800Capitalization rate (12%)0.120.12Market value equity225000190000Market value of debt0175000Total value225000365000