CAL (Q.4, SQ. 2. The Net Sales of Apex Co. are & 15 crores. ‘ EBIT of the company as a percentage of Net sales is 12%. The Capital Employeq comprises & 5 crores of equity, € 1 crore of Cumulative Redeemable Preference Shares bearing 13% rate of dividend and Debt capital of © 3 crores at an annual interest rate of 15% and corporate Income tax Rate is 40%. Required : pan ie (i) Calculate of Return on Equity (ROE) for the company and indicate its segments due to the presence of Preference Share Capital and Debt Capital. ; (ii) Calculate the Operating Leverage of the Company given that its Combined Leverage is 3. The Adarsh Ltd. is considering methods to finance its investment proposal. It is estimated that initially € 4,00,000 will be needed. Two alternative methods of raising funds are available to the firm : (a) Issue of 15% Loan amounting to % 2,00,000 and issue of 2,000 equity shares of % 100 each ; and (b) Issue of 4,000 equity shares of & 100 each. The appropriate tax rate is 35 per cent. (i) Assuming operating profits (EBIT) of : (a) ¥ 70,000, and (b) = 80,000, which financing proposal would you recommend and why? (ii) Compute the indifference point of the two financial plans. . A new project consideration by your company requires a capital investment of % 150 lakh. The required funds can be raised either through the sale of equity shares or borrowed from a financial institution. Interest on term loans is 15 per cent and tax rate is 35 per cent. If the debt-equity ratio insisted by the financing agencies is 2: 1, calculate the indifference point for the project. Explain its meaning. Also, prepare a verification table. . Hypothetical Ltd. is in need of & 1,00,000 to finance its increased ‘net working capital requirements. The finance manager of the com ; PE worr financial costs and share price will be uneffecteg oy ise ee ical plan, since a small sum is involved. Debentures will cost 10 per cect ee ieulet shares 11 per cent, and equity shares can be sold for € 25 per share ‘Tre ton vale is 35 per cent. Dividend tax is 10%. are. The tax ra Sources of funds Equity shares Preference shares Debentures (i) Determine the financial break even point (i) Which plan has greater risk? Assume EBIT level of € 59,099, | |. Three financing plans are bein, - XLtd is considering nsiders th or three alternatives to fi '© Objective of maximising earnings P' nance the epee oe or €15,00,000 and the bai er°)8% by raising debt of €2,50,000 hares. The company © Share ia current selling at © 180, sat we expected to decline to 125, in consi uires Z 10,00,000/- for construction of a new plant. twantens mans oa bee aah Goment market price of the share is © 30. It has tax rate of 50% and debt financing can be arranged as follows : upto £ 1,00,000/- @ 10% from & 1,00,000/- to & 5,00,000/. @ 14% and over ® 5,00,000/- @ 18%. The three financing plans and the corresponding EBIT are as follows : Plan 1 : 1,00,000/- debt; expected EBIT ¥ 2.50,000/- Plan 2: % 3,00,000/- debt; expected EBIT & 3,50,000/- Plan 3: © 6,00,000/- debt; expected EBIT € 5,00,000/- Find out the EPS for all the three Plans and suggest which plan is better from the point of view of the company. the following two alternative financing plans Equity Shares of 2 10 each 12% Debentures Preference Shares of % 100 each The indifference point between two plans is & 2,40,000/-. Corporate Tax is 30%. Calculate the rate of dividend on preference shares. A promoter is considering methods of finance establishment of a company. Initially, %2,00,000 will be needed. The promoter is considering two proposals for the Purpose (a) issue of 15% Debentures of & 1,00,000, and issue of 1,000 equity shares GF % 100 each; and (0) issue of 2,000 equity shares of € 100 each. The tax rate is 35 per cent, 0) (a) — Compute the indifference point of the above proposed financial plang (b) Show that the indifference point computed in (a) above ig correct, (ii) Initially, the company is expected to operate at a level of 1,00,000 tina S (selling price % 2 per unit; variable cost, Re Per unit, and fice operating costs, % 50,000). Calculate the Estimateg EPs. Which Plan should be selected. be the same as given jr “ ‘ ii Nin situatio; A Assuming everything to be , NM (b) (ii) @: Te sserniee rises by 20 per cent from 1,00,000 units to 1,20,000 once Calculate the EPS| .\,Q. 9. Key information pertaining to the proposed new financing plans of Hypothetical Lig, is given below : Sources of funds Financing plans Equity 15,000 shares of & 100 each 2 1 30,000 shares of @ 100 each Preference shares 12% 25,000 shares of & 100 each Debentures 5,00,000 at a coupon rate of 0.10 &% 15,00,000 at a coupon rate of 0.11 Assuming 35 per cent tax rate, i) (ii) (iii) (iv) ™) Q. 10.(a) (b) Determine the two EBIT - EPS coordinates for each financial plan Determine the (a) indifference point, and (b) financial break-even point for each financing plan. Which plan has more financial risk and why? Indicate over what EBIT range, if any, one plan is better than the other. If the firm is fairly certain that its EBIT will be & 12,50,000, which plan would you recommend, and why? The existing capital structure of XYZ Ltd. is as under : Equity Shares of % 100 each & 40,00,000 Retained Earnings & 10,00,000 9% Preference Shares ® 25,00,000 7% Debentures & 25,00,000 The existing rate of return on the compan income-tax rate is 50%. Ee capital, ts, 12% and thy The company requires a sum of % 2 Programme for which it is considering t (i) Issue of 20,000 equity shares a (ii) _ Issue of 10% preference shares, (ili) _ Issue of 8% debentures. ,00,000 to finance its expansion he following alternatives : Itis estimated that the Price E, ari ea and debenture financing woul ing ratios in the Id be Which of the above alternatives w Give reasons for your Choice in (Q. 11. The following figures of Jay Ltd. are presented to Earnings before Interest and Tax - Debenture interest @ 8% - Long term loan interest @ 11% Profit before tax |- Income tax Earnings after tax No. of equity shares of & 10 each EPS @) 3,00,000 20,00,000 10,00,000 10,00,000 Market price of share ®) '5,00,000 2 20 PE Ratio 10 The company has undistributed reserves and Surplus of & 20 lacs. It is in need of = 30 lacs to pay off debentures and modernize its plants. It seeks advice on the following alternative modes of raising finance : Alternative 1: Raising entire amount as term loan from banks @ 12%. Alternative 2 : Raising part of the funds by issue of 10,00,009 shares of € 20 each and the rest by term loan at 12%. en The company expects to improve its of return by 2% as a result of modernization, but PE ratio is likely to go down to 8 if the entire amount is raised as term loan. (i) Advise the company on the financial plan to be selected. (ii) _ If it is assumed that there will be no change in the PE Ratio if either of the two alternatives are adopted, would your advice still hold good? Q. 12.X Y Limited provides you with following figures : Profit Less: Interest on Debentures @ 12% Less: Income tax @ 50% Profit after tax Number of Equity shares (of = 10 each) EPS (Earning per share) Ruling price in market PE Ratio (i.e. Price / EPS) The Company has undistributed reserves of € 6 00,000. The company needs & Sane for expansion. This amount will earn at the same rate as funds already employed. You are “es ratiol___Dedt__Thi : : informed that a debt equity ratio) = higher than 35% will push the P/E Ratio down to 8 and raise the interest rate on additional amount borr are require to ascertain the probable price of the share. (i) if the additional funds are Falged as debt ; (ii) if the amount is raised by issuing equity shares. ; Owed to 14%. YouQ. 13.The following figures are made available to you : Net profit for the year "8.00009 - Interest on secured debentures at 15% P.a- (debentures were issued 3 months after the commencement of the year) __1.12.599 16.87.50 = Income - tax at 35% and dividend distribution tax 8.43.75 Profit after Tax 8.43,759 Number of equity shares (€ 10 each) 1,00,009 | Market quotation of equity share The company has accumulated revenue reserves of % 12,00,000. The company j examining a project catling for an investment obligation of & 10,00,000 ; thi investment is expected to earn the same rate of return as funds already employe You are informed that a debt equity ratio (Debt divided by debt plus equity) high than 60% will cause the price earning ratio to come down by 25%. The interest ra ‘on additional borrowals will cost company 300 basis points more than on thei current borrowal 4n secured debentures. You are required to advise the company on the probal (a) the additional investment were to be raised way of loans ; or (b) _ the additional investment were to be raised by way of equity. ble price of the equity share, if Q. 14PQR Ltd. is considering expansion of its plant capacity to meet the growing demand, The company would finance the expansion either with 15%, Debentures or issue 10,00,000 shares at a price of %16 per share. The funds requirement | Z 1,60,00,000. The average rate of tax applicable to the company is 51.75%. TI company’s Profit and Loss Statement before expansion is as follows : : Interest . : Tax @ 51.75% Number of shares (lacs) The company's expected EBIT with associated probabilities after expansion is aS follo Probabili 630 0.10 You are required to calculate the company's ‘expected EBIT and EPS for each planq een Q. 1HEXE Limited is consider - ——— t (@) Total investnc2tina three financing plana, The key information is as follows Ment to be rai (0) Plans of Financing Bisbee 2,00,000 Pla a Equity Debt Preference Shares B 100% an pee c 50% 50% — (©) Cost of debt 50% me 50% Cost of prefere, 8% (4) Taxrate ne, eres 8% (e) Equity shares of the fax fo (Expected porte aye oF 10 cach ibe sued ata premium f€ 10 Pe Determine for each pian : Mt) Earning per share (EPS) and (ii) The financial break even point. (iii) Indicate if any of the plans dominate and compute the PBIT range among the plans for indifference. é Q. 16. The existing capital structure of Twinkle Enterprises is as follows : Paid Up share capital of % 10 each % 10 crores Reserves and Surplus % 15 crores 14% Debentures % 15 crores An expansion plan requiring % 20 crores is being considered and the plan is expected to have an increase of & 6 crores in EBIT from its present level of = 8 crores. The following three plans to financing have been suggested. Option 1 : To issue equity shares of t 10 each at a premium of € 40 per share. The share issue expenses as also the under pricing of the issue in comparison to the current market price result in net proceeds of % 40 per share for every new share issued. Option 2 : To borrow at the rare of 15% from financial institutions. Option 3 : To borrow % 10 crore @ 15% and balanced to be produced by the issue of equity shares as per the terms indicated in the option 1. The applicable income tax rate is 40%. Find out 4. If the expansion plan is to be considered only if the EPS increases from its present level, indicate whether the expansion plan qualifies for consideration? 2. ‘At what level of EBIT, the EPS will be equal to zero under each of the financing alternative? 3. Determine the indifference level of EBIT among the three options.