Course : Portfolio Management

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Course : Portfolio Management
From the following selected data, determine the value of
the firm, value of Equity, cost of equity and verify your
calculations with overall cost of capital of the firm under
Net Operating Income approach.
6.
EBIT
OMR
225,000
15%
Debt
OMR
500,000
Overall
Cost
of
Capital
25.7142%
Valuation of Total Value of Firm and Overall cost of Capital (WACC) under
NΟΙ Approach
15% Debt of
|OMR 500,000
Step-1 Total Market Value of the firm (V)
Total value of the firm = EBIT / Ko = 225000/0.257142
EBIT = 225000
Ko = overall cost of capital = 25.7142% = 0.257142
875003
Step-2 Total value of Equity ( E)
total Value of firm = Value of Equity + Value of Debt
V =E+D..Therefore, E = V-D
Step 1 - Debt
So, 875003 - 500000 = 375003
375003
Step-3 Calculate Cost of Equity (Ke)
cost of Equity = (EBIT - IME = (225000-75000)/375003 = 0.4
EBIT = 225000
I- Interest = 500000 * 15% = 75,000
E = Step 2 = 375003
Step-4 Calculation of Overall Cost of capital (Ko)(WACC)
WACC = Ke(E/V) + Kd (D/V)
40%
= (0.4)(375003/875003) + (0.15)(500000/875003)
(0.4)(0.4285) + (0.15)(0.5714)
0.1714 +0.08571 = 0.25711
25.711%
Transcribed Image Text:From the following selected data, determine the value of the firm, value of Equity, cost of equity and verify your calculations with overall cost of capital of the firm under Net Operating Income approach. 6. EBIT OMR 225,000 15% Debt OMR 500,000 Overall Cost of Capital 25.7142% Valuation of Total Value of Firm and Overall cost of Capital (WACC) under NΟΙ Approach 15% Debt of |OMR 500,000 Step-1 Total Market Value of the firm (V) Total value of the firm = EBIT / Ko = 225000/0.257142 EBIT = 225000 Ko = overall cost of capital = 25.7142% = 0.257142 875003 Step-2 Total value of Equity ( E) total Value of firm = Value of Equity + Value of Debt V =E+D..Therefore, E = V-D Step 1 - Debt So, 875003 - 500000 = 375003 375003 Step-3 Calculate Cost of Equity (Ke) cost of Equity = (EBIT - IME = (225000-75000)/375003 = 0.4 EBIT = 225000 I- Interest = 500000 * 15% = 75,000 E = Step 2 = 375003 Step-4 Calculation of Overall Cost of capital (Ko)(WACC) WACC = Ke(E/V) + Kd (D/V) 40% = (0.4)(375003/875003) + (0.15)(500000/875003) (0.4)(0.4285) + (0.15)(0.5714) 0.1714 +0.08571 = 0.25711 25.711%
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