DCF Limited has its Earnings Before Interest and Taxes (EBIT) of 60,00,000. The company is evaluating options to introduce debt financing in its…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2026
DCF Limited has its Earnings Before Interest and Taxes (EBIT) of 60,00,000. The company is evaluating options to introduce debt financing in its capital structure. Following information are related to various options of debt financing in the capital structure: Option Debt in capital structure Cost of debt (Kd) Cost of equity (Ke) 1 60,00,000 10% 12% 2 75,00,000 13% 15% 3 90,00,000 14% 16% 4 1,05,00,000 14% 16% Assuming that the company operates in zero tax regime. WHICH option of debt financing in the capital structure would you recommend as per Traditional Approach of the capital structure theory?

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PART II - Descriptive Questions 1. (a) Particulars 1 2 3 4 EBIT 60,00,000 60,00,000 60,00,000 60,00,000 Less: Interest 6,00,000 9,75,000 12,60,000 14,70,000 Earning available for equity holders [A] 54,00,000 50,25,000 47,40,000 45,30,000 Equity capitalization rate [B] 12% 15% 16% 16% Market Value of equity [A]/[B] 4,50,00,000 3,35,00,000 2,96,25,000 2,83,12,500 Market value of debt (given) 60,00,000 75,00,000 90,00,000 105,00,000 Total Market Value 5,10,00,000 4,10,00,000 3,86,25,000 3,88,12,500 Overall cost of capital = EBIT × 100 / Total Market Value 11.76% 14.63% 15.53% 15.46% The capital structure having debt of 60,00,000 is recommended as overall cost of capital is minimum at 11.76%.

Topics: Part-A: Financial Management

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