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.
CAclubindia
