Question

Charge It Company operates in perfect capital markets and earns a net operating profit of R2 million each and every year. It operates in an industry in which the required return on assets is 8%. The firm has R12,500,000 worth of outstanding bonds that pay 5% interest, and it has R12,500,000 in common stock with a required return of 11%. What is the total value of the company?
R10,000,000
R15,000,000
R20,000,000
R25,000,000

Answer 1

To find the total value of the company, we can use the formula for the total value of a firm in perfect capital markets:

Total Value = Net Operating Profit / Required Return on Assets

Total Value = R2,000,000 / 0.08 = R25,000,000

Therefore, the total value of the company is R25,000,000.