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affected by the capital structure changes. The capital structure decisions of the firm are irrelevant. And change in the leverage will not lead to any change in the total value of the firm and the market price of the shares. The market value of the firm is ascertained by capitalising the net operating income at the overall cost of capital (K) which is considered to be constant. The market value of equity is ascertained by deducting the market value of the debt from the market value of the firm. The net operating income approach is based on the following assumptions: (1) The overall cost of capital (K) remains constant for all degree of debt-equity mix. (2) The market capitalises the value of the firm as a whole and therefore, the spit between debt and equity is not relevant. (3) The low cost debt increases the risk of equity shareholders. This results in increase in equity capitalisation rate. An increase in the use of debt is offset by an increase in the 18 equity capitalisation rate. The value of the firm is determined as follows: EBIT V = k Where, V = Value of the firm K = Overall cost of Capital EBIT = Earning before interest and tax. The value of equity can be determined by using the following formula: S = V-D Where, S = Value of Equity V = Value of firm D = Value of Debt 'X' Ltd has an EBIT of Rs. 10 lakhs. The cost of Debt is 10% and the outstanding debt amounts to Rs. 3,00,000. If the overall capitalisation rate is 12.5%, calculate the total value of the firm and equity capitalisation rate

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