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
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
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
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