Q 04: Required: Calculate the value of Firm and WACC forthe following capitalstructures EBIT of Firm. 250,000 Ke =11% Kd 7% Debt capital Rs. Debt = Rs. 700,000 Debt =Rs. 200,000 500,000 Particulars Case 1 Case 2 Case 3 EBIT 250,000 250.000 250,000 () Interest 30.000 42.000 12,000 ЕВТ 220,000 208 000 238,000 Ke 10% 10% 10% Value of Equity 22.00,000 208.0000 2380.000 (ЕВТ/ Ке) Value of Debt 500,000 700.000 200,000 Total Value of Firm 2.700.000 780 000 2580,000 WACC (EBIT/Value) 100 Answer:
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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