Financial management ratio analysis


11 February 2023 Q.5 The following figures of Ram Ltd are presented as under:
EBIT
Rs. 23,00,000
Less: Debenture Interest @ 8%
Rs. 80,000
Long Term Loan Interest @ 11%
Rs. 2,20,000
PBT
Rs. 20,00,000
Less: Income Tax
Rs. 10,00,000
PAT
Rs. 10,00,000
EPS
Rs. 2
MPS
Rs. 20
PE
10
The Company has undistributed reserves and surplus of Rs. 20 Lakhs. It is in need of Rs. 30 Lakhs
to payoff debentures and modernize its plants. It seeks your advice on the following alternative modes
of raising finance.
Alternative 1: Raising entire amount as term loan from banks at 12 percent
Alternative 2: Raising part funds by issue of 1,00,000 shares of Rs. 20 each and the rest by term loan
at 12%
The company expects to improve its Rate of Return by 2% as a result of modernization, but PE is
likely to go down to 8, if entire amount is raised as Term Loan.
Advise the company on the Financial Plan to be selected.



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