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How to calculate market value of a company?
Solution
The 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 value
| Company X | Company Y | |
|---|---|---|
| Rs | Rs | |
| Net operating income | 45000 | 45000 |
| Interest on debt | 0 | 7000 |
| 45000 | 38000 | |
| Profit before taxes | 45000 | 38000 |
| Taxes (40%) | 18000 | 15200 |
| 27000 | 22800 | |
| Capitalization rate (12%) | 0.12 | 0.12 |
| Market value equity | 225000 | 190000 |
| Market value of debt | 0 | 175000 |
| Total value | 225000 | 365000 |
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