Question

The EBIT of a firm is INR 15 crores. The firm is currently all equity financed at a cost of equity capital of 15%. The firm intends to lever up and change its capital structure by taking on debt of INR50 crores in perpetuity as it provides some value add to the firm. If the prevailing tax rate is 20%, what is the value of this firm before and after the change in capital structure? The firm is currently efficiently run and the shareholders are happy with the current earnings and do not intend to change the earnings in the future.

Answer #1

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Consider
Dronalution, Inc. a
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5,000 shares outstanding at a price of $53 per share. EBIT is
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following. Ignore taxes.
Discuss
Mr. Fisher one of the firm's shareholders, owns 200 shares of
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Firm value based approach- illustration
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Earnings before Interest and after Tax (EBIAT) or Net Operating
Profit after Tax (NOPAT): 10%
Present investment in WC: zero
Present Growth rate in operating income: 5%
Current cost of capital: 15%
Cost of Capital drops by 0.10% for every 10% increase in
WC/Revenue
Growth rate in revenue and EBIAT: 6%,6.5% ,6.83% and 6.93% when
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Ignore delta capex depreciation and amortization....

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