Question

If the market value of debt of a firm is Rs. 40 lakhs, that of equity is Rs. 60 lakhs and the costs of equity and debt are $16\%$ and $14\%$ respectively, the net operating income for the firm if the firm has $100\%$ dividend payment and no taxes is _______________.

• A. Rs. 13.8 lakhs
• B. Rs. 14.2 lakhs
• C. Rs. 15.2 lakhs
• D. Rs. 15.8 lakhs
• E. Rs. 16.2 lakhs

Answer 1

Answer: (C)

Rs. 15.2 lakhs

K${}_o$= O / V = Net operating incomes / Market value of the firm
Also K${}_o$ = K${}_d$(D/D+S) + K${}_e$(S/D+S)
=0.14(40/100)+0.16(60/100)
=0.152
Net operating income = K X market value of the firm
= 0.152 X 100 lakh = 15.2 lakh.