Q1:

capital structure is whether mixed or proportion your total value of company will remain same in
any case in perfect market condition. Whether you take 30 debt 70 equity ur other value your
total value remains the same.  It assumes that the benefit that a firm derives by infusion of debt is
negated by the simultaneous increase in the required rate of return by the equity shareholders
.There are no taxes to paid.no floatation costs and no bankruptcy costs etc. net operating income
approach says that value of a firm depends on operating income and associated business risk.
Value of firm will not be affected by change in debt components.
The traditional theory of capital structure states that when the weighted average cost of capital
(WACC) is minimized, and the market value of assets is maximized, an optimal structure of
capital exists. This is achieved by utilizing a mix of both equity and debt capital. Called as the
theory of real market and imperfect market in this theory company use levarage very perfectly
due to which company’s capital structure will be optimal level. Assumptions are there are no
taxes to paid. Dividend changes. Bear bankruptcy costs and pay floatation costs.
Q2:
A:
Net operating income = 1500,000
Interst on debt= 3000000 ×0.12 = 360,000
E = O -I
= 1500,000 – 360,000
= 1140,000
Market value of equity( MVE) = E/ ke
= 1140000 divided by 15%
= 7600,000
Total value = MVE+ MVD
= 7600,000 + 3000,000
= 10,600,000
B:
Ko = NOI ÷ TV
= 1500000 ÷ 10,600,000
= 0.14 = 14%
Q3: A:
EBIT = 4000000
Tax = 40%
Interest ki = 12%
Ke = 22%
EBIT = 4000000 (40% tax and 60% div)
Tax = 1600000
Div= 2400000
Ke = div/MVE MVE= div/ke
MVE = 2400,000 / 22% = 10,909,090
B:
Bankruptcy cost with debt 300,000
= 10909090 +(6000,000×0.60) – 300,000
= 10909090 + 3600,000 -300000
= 14,209,090 value of firm