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MB0045 : Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000

Posted on: September 20, 2011

MB0045 :   Given the following details for a company:
Net operating income 200,000

Overall cost of capital 20%

Value of the firm 1000,000

Cost of debt 15%

Interest 75,000

Market value of debt 500,000

Market value of equity 500,000

a) Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000.

b) Given the assumptions of the net income approach, what will be the overall cost of capital with Market value of debt of 200,000.

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a) Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000.

 

Solution:

The equity capitalization rates are

Ke        = K0+[ (K0 – Kd)(B/S)]

                                                = 0.20 + [ (0.20 – 0.15) (2.5) ]

                                                = 0.325 = 32.5%

b) Given the assumptions of the net income approach, what will be the overall cost of capital with Market value of debt of 200,000.

Solution:

Cost of capital

K0        = [B/ (B+S)]Kd + [S/(B+S)]Ke

                        = [500,000 / (500,000 + 200,000)] 15% + 200,000 / (500,000 + 200, 000)] 32.5%

                        = 0.107 + 0.092 = 0.199

= 19.9%

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1 Response to "MB0045 : Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000"

good work done!!

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