Theta Limited is expecting an annual earning of 3 Lakhs before paying any interest and taxes. The company has 10 lakhs of 10% debentures in its…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2025
Theta Limited is expecting an annual earning of 3 Lakhs before paying any interest and taxes. The company has 10 lakhs of 10% debentures in its capital structure. The capitalisation rate is 12.5%. You are required to calculate the value of Theta Limited as per the NI approach. Also, COMPUTE the overall cost of capital.

Suggested Answer and Working Notes:

EBIT = 3,00,000 Less: Interest = 10,00,000 × 10% = 1,00,000 Earnings available to equity shareholders = 2,00,000 Equity capitalization rate = 12.5% Market value of equity = 2,00,000 / 12.5% = 16,00,000 Market value of debt = 10,00,000 Market value of the firm = 26,00,000 Overall cost of capital = (₹ 3,00,000 × 100) /26,00,000 = 11.54%

Topics: Part-A: Financial Management

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