Capital structure analysis

1. Made By:- Vikram, Ankit, Preeti, Arpan & Vikas

10. Value of Firm (Net Income Approach) Increase Decrease Net Operating Income (EBIT) 50000 50000 50000 Less Intrest on Debenture 20000 30000 10000 Earning available to Equity Holder(NI) 30000 20000 40000 Equity Capitalisation rate (Ke) 0.125 0.125 0.125 Market value of Equity(S)=NI/Ke 240000 160000 320000 Market Value of Debt(B) 200000 300000 100000 Total Value of firm(S+B=V) 440000 460000 420000 Overall Cost of Capital(Ko)=EBIT/V(%) 11.36% 10.90% 11.90% Cost of Equity 0.10(200000/4400000) +0.125(240000/440000) _ _

11. Cost of Capital Leverage K D K E K o

14. Value of Firm (Net Operating Income Approach) Net Operating Income (EBIT) 50000 Overall Capitalization rate (Ko) 0.125 Total Market value of Firm(V)=EBIT/Ko 400000 Total Value of Debt(B) 100000 Total market Value of Equity(S)=(V-B) 300000 Ke =50000-10000/300000 0.133 Ko=0.125 0.10(100000/400000) +0.133(300000/400000)

15. Cost of Capital Leverage K D K E K o

18. Value of Firm (Traditional Approach) Net Operating Income (EBIT) 40000 Less - Intrest 10000 Earings Available to Equity Holders (NI) 30000 Equity Capitalisation rate (Ke) 0.16 Total market Value of Equity(S)=NI/Ke 187500 Total market Value of Debt(B) 100000 Total Value of firm (V)=(S+B) 287500 ( Overall Cost of Capital)Ko=EBIT/V 0.139 Debt Equity ratio(B/S)=(100000/187500) 0.53

19. r D E r D r E WACC Optimal Capital Structure

24. Proof with capital structure arbitrage 20% 15.38% WACC, K o = EBIT/V 50,00,000 65,00,000 Total Value, V, - 30,00,000 Value of debt 50,00,000 35,00,000 Value of equity .20 .20 Equity capitalisation rate, K e , 10,00,000 7,00,000 Net Profit - 3,00,000 (-) Interest 10,00,000 10,00,000 EBIT ULE & Co. LEV & Co. Particulars

26. Return available 70,000 Net Return 30,000 (-) Interest payable @10% on Rs. 3,00,000 loan 1,00,000 Profit available from ULE & Co. (being 10% of net profit)