Question

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.

Answer 1

$Firm value = Debt value + Equity value$

$Firm value = 3,000,000 + 1,000,000\times0.1 = 3,100,000.$

$Cost of capital = \frac{3,000,000\times0.05}{100,000} = 1.5$ or 150%.