Page 191 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes NI EarningavailabletoESH
Costofequity = =
S Marketvalueofequityshares
EBIT - I 1,00,000 - 50,000
K e = = = 16,66%
V - B 8,00,000 - 5,00,000
Market value of equity shares: Assuming the market price of shares to be 100, there are 3000
shares of 100 each.
If the company increases the debt from 5,00,000 to 6,00,000 the Ke and the value of the firm are
as below:

Net operating income (EBIT) ( ) 1,00,000
Overall cost of capital (Ko) 0.125
Total value of the firm (V=EBIT/Ko)( ) 8,00,000
Market value of debt (B) ( ) 6,00,000
Market value of the equity (S) ( ) 2,00,000

NI 40,000
Costofequity = = = 20%
S 2,00,000



Caselet Rise in Net Income

ognizant Technology Solutions Corporation, the US-based software company with
offshore development centres in India, reported a 17 per cent increase in net
Cincome to $112 million during the fourth quarter ended December 2008 against
$96 million in the fourth quarter of 2007.
Quarterly revenue rose to $753 million, up 26 per cent from the $600 million in the fourth
quarter of 2007, and up 2.5 per cent from $735 million in the third quarter of 2008.
Net income for the full year was $431 million, a 23 per cent increase over the $350 million
reported in 2007. Revenue for 2008 increased to $2.82 billion, up 32 per cent from $2.14
billion for 2007, according to a company press release.
Based on current global economic weakness and recent customer feedback, Cognizant has
said that its first quarter revenue in 2009 is anticipated to be $735 million and full-year
revenue for the year to be at least $3.1 billon, up at least 10 per cent when compared to 2008
numbers.
Source: thehindubusinessline.com

Market Value of the Equity Shares

The firm has increased the debt by 1,00,000 and used the proceeds to reduce equity capital. The
number of shares has reduced from 3000 to 2000. Therefore, the price per share can be calculated
as below:
Total market value of the shares
Price per share 
Number of shares
So, there is no change in the price per share, total value of the firm and overall cost of the capital
when the leverage is changed.

186 LOVELY PROFESSIONAL UNIVERSITY