valuation methods of enterprises

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valuation methods of enterprises

The XYZ Company has net operating earnings of $10 million and $20 million of debt with a 7% interest charge, Assume a world with no taxes in all cases.

(a) Using the net income (NI) method and assuming the cost of equity is 12.5%,

compute the total value of the firm and the cost of capital.

(b) Next, Assume that the firm issues an additional $10 million in debt and uses the

proceeds to repurchase stock, and that the cost of debt and the cost of equity remain

the same. Compute the new total value of the firm and the cost of capital.

(c) Using the net operating income (NOI) approach, and assuming a cost of capital of 11%, calculate the market value of the common equity and the cost of capital for XYZ, prior to the sale of debt in part (b).

business finance accounting

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valuation methods of enterprises

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