Question: QUESTION 6 (a) ABC & Co expects a net income of K 80,000. It has 8% Debentures worth K 2,000,000. The equity capitalisation rate of

QUESTION 6 (a) 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%. (i) Calculate the value of the firm and overall cost of capital according to the Net Income approach. (Ignoring income tax) (ii) 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) .(b) 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%. (i) Calculate the value of the firm and the equity capitalisation rate according to NOI approach. (ii) 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)

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