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has developed a financing plan for the next three years based on following estimates. (Rs. Lakhs) Year 1 Year 2 Year 3 Sales Fixed Assets The following assumptions have been made for the purpose of planning Gross Profit Return on Sales (Net of Taxes) Dividend payout ratio Ratios based on year end figures: Cash and debtors to sales Inventory (to cost of goods sold) Required current ratio Required ratio of long-term debt to equity 4 times 3 times 2:1 1:2 30% 10% 50% 600 480 720 570 900 660
At the beginning of Year 1 the firm expects to have equity of Rs. 360 lakhs and long-term debt of Rs. 180 lakhs. Determine how much additional equity capital the firm will have to raise each year based on above ratios and assumptions. Assume that the company is not seeking separate finance from bank for additional working capital needs.
.5 7.0 5.0 12. a widely held company is considering a major expansion of its production facilities and the following alternatives are available: (Rs.0 16. Corporate taxation 50%.5 6.5 13.a.0 14.0 Cost of debt % Cost of equity% Calculate the optimal debt-equity mix for the company by calculating composite cost of capital.0 12. rate of interest A 50 _ _ B 20 20 10 C 10 15 25 Expected rate of return before tax is 25%. Lakhs) Alternatives Particulars Share Capital 14% Debentures Loan from a financial institution @18% p.0 6. ABC Ltd.0 12.0 20. the following estimates of the cost of debt and equity capital (after tax) have been made at various levels of debt-equity mix: Debt as % of Total capital employed 0 10 20 30 40 50 60 5. In considering the most desirable capital structure of a company.0 5.0 5. The company at present has low debt. The rate of dividend of the company is not less than 20%.2. Which of the alternatives you would choose? 3.
100 lakhs for a diversification project. Tax rate applicable to the company is 50%. Paramount Ltd. 50 lakhs are raised. 40 lakhs per annum. 10) of the company have a current market value of Rs. The following options are under consideration of the company. 50 lakhs. the following options are under consideration of the management.4. (c) To issue equity capital for Rs. It is expected that the new shares (face value of Rs. 100 lakhs consisting of 10 lakh ordinary shares of Rs. 50 lakhs and 18% for additional amounts above Rs. Eastern India Ltd. 10) can be sold at a premium of Rs. (b) To issue 16% non-convertible debentures of Rs. 50 lakhs and which is expected to yield a pre-tax income of Rs. The company is paying income-tax at 50%. 25 lakhs (face value of Rs. 22 lakhs per annum. 40. 15. 40 each. Show workings. . Cost of debt will be 15% for amounts up to and including Rs. 10 each. Note: The management wants to maximize the earnings per share to maintain its goodwill. In this case the company can issue shares at a premium of Rs. 80. This is expected to fall to Rs. 100 each for the entire amount. To raise this additional capital. The equity shares (face value Rs. wants to raise Rs. it is earning an annual pre-tax profit of Rs. Current estimate of earnings before interest and taxes (EBIT) from the new projects is Rs. The company s shares are listed and are quoted in the range of Rs. Advice the management as to how the additional capital can be raised. 40 lakhs. Option Equity Debt I 50% 50% II 60% 40% III 40% 60% Determine the earning per share (EPS) for each option and state which option the company should exercise. The management wants to diversify production and has approved a project which will cost Rs. is a profit-making company with a paid-up capital of Rs. 32 if debts exceeding Rs. 60 lakhs. 16% for additional amounts up to and including Rs. 10) and 16% non-convertible debentures for the balance amount. 50 to Rs. Currently. 5. (a) To issue equity capital for the entire additional amount.
6. Assuming the tax rate to be 50%. 10. (iii) The company may issue 25. 2. 20. 2.000 for a new plant. Rs.50. 40 which is expected to drop to Rs.000.000. needs Rs. 25 per share if the market borrowings were to exceed Rs. 8. 7. 6.000 and at 20% over Rs.00. the company considers the objective of maximizing earnings per share. 100 denomination bearing 8% rate of dividend.000. 12.000 or Rs. Between Rs.25. 25.000 for construction of a new plant.000 and upto Rs. 100 per share bearing 8% rate of dividend. The company has the objective of maximizing the earnings per share. 10.a. This plant is expected to yield earnings before interest and taxes of Rs.00. Rs.500 debentures of Rs.50.000.000.001 to Rs.000 and Rs.25. Rs.00. by issuing equity shares.500 preference shares at Rs.00.000.50. work out the EPS and the scheme which would meet the objective of the management. Rs.a.000 or Rs. 150. 5. The BCA Ltd.000 equity shares at Rs. 10 per share and 2. 60.000. requires Rs.000. The Model Chemicals Ltd.000.000 14% p. 2. what are the earnings per share under each of the three financial plans? Which alternative would you recommend and why? Assume corporate tax rate to be 50%. 40. Between Rs. at 15% over Rs.50. The following three financial plans are feasible: (i) The company may issue 50.00.50. 2. Cost of borrowings are indicated as under: Upto Rs. The current market price per share is Rs.000 16% p.00. While deciding about the financial plan. Which form of financing should the company choose? . 1. 10.000 equity shares at Rs. If the company s earnings before interest and taxes are Rs.000 for the installation of a new factory which would yield an annual EBIT of Rs.00.00. 2.000 equity shares at Rs. 10.00. 5. It has three alternatives to finance the project-by raising debt of Rs.00. 2.50. in each case.000. 7. 10 per share. 10. It is considering the possibility of issuing equity shares plus raising a debt of Rs.000. (ii) The company may issue 25.00. but is expected to decline to Rs. 10. 10 per share and 2. The funds can be borrowed at the rate of 10% upto Rs. 125 in case the funds are borrowed in excess of Rs.001 to Rs.000 or Rs. 6. 10.6.000. 15. The company s share is currently selling at Rs.00. The tax rate applicable to the company is 50%. 2.000 and the balance.000 10% p.a.00. A company needs Rs.00.00.
It is considering the following options: (i) (ii) (iii) Issue equity shares at a premium of Rs. 25. 100 each Retained earnings 9% Preference shares 7% Debentures Company earns a return of 12% and the tax on income is 50%. Issue 12% debentures for Rs.00.000 for its expansion project for which it is considering following alternatives: (i) (ii) Issue of 20. 25 per share. The existing capital structure of XYZ Ltd. . 50 lakhs required additionally. 40 lakhs to Rs. has the following structure Ordinary shares: 10 lakh Nos. The company s tax rate is 40%.000 Equity shares at a premium of Rs. Company wants to raise Rs. KLM Ltd. 25 lakhs at a premium of Rs. 15 each for the entire amount. Lakhs) 100 40 60 200 The company needs Rs. Evaluate the three options and advise the company.00. Issue equity shares for Rs.00.00. 100 (Rs.17 and 16 respectively. 50 lakhs to execute a new project which will raise its operating profit (EBIT) from the current level of Rs. 40. 10 each Reserves and surplus 10% debentures each of face value of Rs.000 25. Equity shares of Rs. Projected that the P/E ratios in the case of equity. 20 per share and issue 12% debentures for the balance amount.000 10.000 25. (iii) Issue of 9% Debentures. Give reasons for your choice. (ii) Issue of 10% preference shares.000 Which alternative would you consider to be the best. 55 lakhs. is as follows: Rs.9.00. preference and debenture financing 20. 10. @ Rs.