Capital structure

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Sriram Somayajula Admin

This is from RTP May 2018 - the solution does not appear to be correct. Under Net operating income approach approach - value of a frim will not change due to capital structure as lower cost of debt will be offset by a higher cost of equity and when you capitalize equity earnings and add value of debt, the total value remains the same - that should be the ideal answer

Sriram Somayajula Admin

This is from RTP May 2018 - the solution does not appear to be correct. Under Net operating income approach approach - value of a frim will not change due to capital structure as lower cost of debt will be offset by a higher cost of equity and when you capitalize equity earnings and add value of debt, the total value remains the same - that should be the ideal answer

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Sriram Somayajula Admin

For attachment refer page 10 last para of link below https://resource.cdn.icai.org/56015bosinter45376-p8-seca-cp5.pdf Value of all equity firm will be Rs.20 Lacs and same will be the value for a levered frim under NOI approach. Part 2 of the answer is incorrect - correct answer is ( 20 lacs P & 20 lacs Q). Part 1 of solution is correct ( 32 lacs & 20 lacs) -