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28 September 2016 It Has Dedided to Raise Rs.5,00,000/- of additional capital funds and has identified two plans . The Information is as follows . Present capital structure : 3,00,000 equity share of Rs.10 each , 10 % bonds of 20,00,000/-

Tax Rate : 50%
Current EBIT : Rs.17,00,000/-
Current EPS : Rs.2.50
Current Market Price : Rs.25 Per share
Financial Plan 1 : 20,000 Equity shares @ Rs 25 per share
Financial Plan 2 : 12% Debentures of Rs.5,00,000/-
Find out which plan is better.

Dear Friends i want solution for the above problem . kindly give your suggestion

28 September 2016 it is typical case of Trading on Equity....
So long as the rate of EBIT is greater than rate of interest on loan/debenture etc, the effect of Trading on Equity is favourable.. So also in the present case.....
with 12% 500,000 debentures, EPS comes to 2.68 whereas with 20,000 equity shares of 25, the EPS comes to 2.61
In the interest of the existing share holders, trading on equity i.e. opting for 12% debenture is better

28 September 2016 Dear Sir,

Thanks for your Reply

We Want calculation for that Can you please send me calculation




28 September 2016 ok.....existing scenario is
EBIT is 17,00,000 i.e. 34% of capital employed..(Capital employed = 30,00,000 + 20,00,000)
interest is 200,000 i.e.10% of bonds 20,00,000
So the EAI is 15,00,000
tax is 50%
So EAT is 750,000
existing equity shares=300,000
so EPS = 750,000 / 300,000 = 2.50..(Which is given in the problem...and it is getting cross verified as well)
is it ok upto this?

28 September 2016 Thank You So Much Sir

28 September 2016 Dear Sir,

I Want One More Problem Iam Posting Now

28 September 2016 now with this 34% rate you can work out plan 1 (Equity) as well as Plan 2 (Debenture)
Capital Employed 55,00,000
EBIT= 34% of 55,00,000= 18,70,000
interest under plan 1 = 200,000 and that of plan 2 = 260,000
EAI under plan 1 = 16,70,000 and that of plan 2 = 16,10,000
EAT under plan 1 = 8,35,000 and that of plan 2 = 8,05,000
number of equity shares under plan 1 = 320,000 and that of plan 2 = 300,000
so EPS under plan 1 = 835,000/320,000 = 2061 and that of plan 2 = 805,000/300,000=2.68

28 September 2016 Calculate Weighted average cost of capital from the following using a) book value method b) Market Value method

1) Equity Share capital Rs. Rs.3,50,000/- with cost of Equity @ 10% market value is Rs.4,50,000/-

2) 8% Preference shares of Rs.4,00,000/- and its market value is Rs. Rs.4,50,000/-

3) 6% Debt of Rs.6,00,000/- and its market value is Rs.5,60,000/-

4) Retained earnings Rs.1,50,000/- which has no change in the market value . It cost is equal to that of cost of Equity.
Can you please send the Reply . Calculation and Theory both sir




28 September 2016 you have sent two calculations both are for first problem or what sir

28 September 2016 yes, they are for first problem.....

28 September 2016 Ok Sir Thank You Can You send the Second problem Solution Please

28 September 2016 you are most welcome......i will get back soon




28 September 2016 Dear Sir ,

Can you give me the reply for above Question

29 September 2016 yes, it will take some time......i am bit busy in tax audit

29 September 2016 Ok Sir Thank you somuch for your quick response .




29 September 2016 you are most welcome.

29 September 2016 Dear Sir,

I resolved the problem i didn't get 4th Point of the above problem can you send the 4th Point solution if you r free

I request you to send the reply by evening . sorry for inconvinience because today is last day for assignment submission


30 September 2016 Dear Sir, I resolved the problem i didn't get 4th Point of the above problem can you send the 4th Point solution if you r free I request you to send the reply by evening . sorry for inconvinience because Yesterday is last day for assignment submission i have taken permission one day for Assignment. can you please send the Reply sir


03 October 2016 so sorry...i was away from my station...



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