QUESTION 6

1. ABC & Co expects a net income of K 80,000. It has 8% Debentures worth K 2,000,000. The equity capitalisation rate of the company is 10%.

1. Calculate the value of the firm and overall cost of capital according to the Net Income approach. (Ignoring income tax)
2. If Debenture debt is increased to K 3,000, 000 what shall be the value of firm and the overall cost of capital? (12 marks)

.(III) SLM Ltd expects a net operating income of K 2,000,000. It has 6% Debentures worth K 10,00,000. The overall capitalisation rate is 10%.

1. Calculate the value of the firm and the equity capitalisation rate according to NOI approach.
2. If the debenture debt is decreased to K 7,500,000 what will be effect on the value of the firm and the equity capitalisation rate ? (13 marks)

(Total: 25 marks)