A firm has Sh 3,000,000 debt at 5% interest in its capital structureand the expected annual operation income is sh 1,000,000 and equity capitalization rate is 10%. Calculate the value of the firm and overall cost of capital.
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Expert's answer
2019-04-03T09:04:32-0400
"Firm value = Debt value + Equity value"
"Firm value = 3,000,000 + 1,000,000\\times0.1 = 3,100,000."
"Cost of capital = \\frac{3,000,000\\times0.05}{100,000} = 1.5" or 150%.
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