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.
EBIT OMR225,000
15% Debt OMR 500,000
Overall Cost of Capital 25.7142%
Valuation of Total Value of Firm and Overall cost of Capital (WACC) under NOI 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
875003
EBIT = 225000
Ko = overall cost of capital = 25.7142% = 0.257142
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 - I)/E = (225000-75000)/375003 = 0.4
40%
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)
= (0.4)(375003/875003) + (0.15)(500000/875003)
(0.4)(0.4285) + (0.15)(0.5714)
0.1714 + 0.08571 = 0.25711
25.711%
