Where,
S = Value of equity
V = Value of firm
B = Value of debt
Ke= Equity Capitalization Rate
Where,
Kd = Cost of Equity Capital
S = Market value of equity
V = S + B
Where,
V = Value of firm
S = Value of equity
B = Value of debt
Market value of Equity, S can be written as:
S = NI/ Ke
Where,
S = Value of equity
NI = Earnings available for equity shareholders
Ke = Equity Capitalization Rate
K = Overall cost of capital
It is also written as:
K = EBIT/ V x 100
NI (Net Income):
Earnings before Interest and Tax xx
Less : Interest xx
PBT xx
Less : Tax xx
PAT xx
Less ; Pre-dividend (if any)
Amount available for equity shareholders xx
Traditional Approach contains some of the features of Net Income Approach and Net Operation Income Approach.
Its formulae can be given by,
Vi = Vu + Bt
Where,
Vi = Value of levered firm
Vu = Value of unlevered firm
B = Amount of debt
t = Tax Rate
Vu = (I – t) EBT/ Ke
or,
Vu = Profits available for equity shareholders/ Equity Capitalization Rate
Note: The term unlevered means debt content in Capital Structure whereas the term levered means no debt content in Capital Structure.
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