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EBIT ₹5,00,000; 10% debentures ₹20 lakh; Equity capitalisation rate (Ke) 16%. Under NI Approach, Market value of equity is:
A₹15,00,000
B₹18,75,000
C₹20,00,000
D₹31,25,000
Answer & Solution
Correct answer: B. ₹18,75,000
1. NI = EBIT − Interest = 5,00,000 − 2,00,000 = ₹3,00,000.
2. Market value of equity S = NI / Ke = 3,00,000 / 0.16.
3. Result = ₹18,75,000.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §2.1 Illustration 1_