A Ltd's annual net operating income is Rs. 8,00,000. The Company has Rs. 15,00,000 of 8% debt outstanding. It's cost of equity capital is estimated to be 12.5%.

1.Calculate the overall cost of capital and the value of the firm using Net Income Approach

2. Comment on the cost of debt, cost of equity, overall cost of capital and value of the firm as per Net Income Approach when the firm is considering to increase its leverage by raising an additional debt and using the proceeds to retire that amount of equity.

(Comment carries 2 marks) need good comment as it carries 2 marks