# A company has \$ 200,000 as EBIT .It has \$ 1,000,000, 10% debentures .The equity capitalization rate (Ke)of the company is 12.5%. Find out the value of the firm under Net Income Approach. Also prove...

A company has \$ 200,000 as EBIT .It has \$ 1,000,000, 10% debentures .The equity capitalization rate (Ke)of the company is 12.5%. Find out the value of the firm under Net Income Approach. Also prove the NI approach.

Rylan Hills | Certified Educator

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The company has \$200,000 as Earnings before Interest and Tax or EBIT. It has 10% debentures with a face value \$1000000.

The interest payable on the debentures is (10/100)*1000000 = \$100000. As the rate of taxation is not provided, it is assumed that no tax is to be paid by the company. This gives the net income of the company as 200000 - 100000 = 100000.

The equity capital rate refers to the ratio of the net operating income and the market capitalization. Here, the equity capital rate is 12.5%. If M is the market capitalization 100000/M = 0.125 or M = 100000/0.125 = 800000

The value of the firm is \$800000

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Karyth Cara | Certified Educator

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