how to solve this problem?
The capital structure of a company consist of the following securities
10% preference share capital Rs1,00,000
Equity share capital (Rs.10 shares) 1,00,000
The amount of operating profit is Rs.60,000.The company is in 50% tax bracket.
you are required to calculate the financial leverage of the company.
And also how to calculate the preference dividend after grossing up???
what is the final answer given in the buk???
i have solved it but isme equity sh cap . ki to zarurat hai nhi shayad..
There is no fixed expense bearing iteams in the capital structure. As no previous year information are provided in question, DOF leverage is 1.
Here EBIT= Rs.60,000/- as there is no interest EBT also Rs.60,000/-
DFL = % change in EPS/ % change in EBIT
(or)
EBIT/ EBT
For this formula EBT means EBT only for equit shareholder i.e excluding the portion that belongs to prefrenceshareholder.
Portion of EBT for preference shareholder = preference dividend/ 1-tax rate
= 10000/1-.5
=Rs.20,000/- ( it is also called as grossing up)
So, EBT for equity shareholder = EBT - EBT for preference sharehlder
= Rs.60,000 - Rs.20,000
= Rs.40000/-
So, DFL = EBIT/EBT
= Rs.60,000/Rs.40,000
=1.5
i.e every 1% increase in EBIT leads to 1.5% increase in EPS
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