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Chapter 20. Capital Structure Decision

1. Celtra Limited’s present capital structure consists of 10 million shares of equity of

Rs.10 each. It requires Rs.50 million of external financing. It is considering two

alternatives:

Alternative 1: Issue of 2 million equity shares of Rs.10 par at Rs.15 each and 2 million
preference shares of Rs.10 par, carrying a dividend rate of 10 percent.

Alternative 2 : Issue of 1 million equity shares of Rs.10 par at Rs. 15 each and Rs.35
million of debentures carrying an interest rate of 12 percent

The company’s tax rate is 30 percent ? What is the EPS-PBIT indifference point ?

a. Rs.17.55 million
b. Rs.18.97 million
c. Rs.20.00 million
d. Rs.22.22 million
e. None of the above

Working :
Alternative 1

(PBIT – 0) (1 – 0.3) – 2

EPS =

12

Alternative 2

(PBIT – 4.2) (0.7)

EPS =

11

0.7 PBIT – 2 0.7 PBIT – 2.94

12 11

7.7 PBIT – 22 = 8.4 PBIT – 35.28

0.7 PBIT = 13.28 PBIT = 18.97

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Fenstar Limited’s present capital structure consists of 20 million shares of equity of

Rs.10 each. It requires Rs.80 million of external financing. It is considering two

alternatives:
Alternative 1 : Issue of 4 million equity shares of Rs.10 par at Rs.15 each
and 2 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2 : Issue of 3 million equity shares of Rs.10 par at Rs.15 each and Rs.35
million of debentures carrying an interest rate of 12 percent

The company’s tax rate is 30 percent ? What is the EPS-PBIT indifference point ?

a. 39.8
b. 42.3
c. 22.2
d. 35.08
e. None of the above

Working : Alternative 1 :
(PBIT – 0) (1 – 0.3) - 2

EPS =

24

Alternative 2 :

(PBIT – 4.2) (0.7)

EPS =

23

0.7 PBIT – 2 0.7 PBIT – 2.94

24 23

16.1 PBIT – 46 = 16.8 PBIT – 70.56

0.7 PBIT = 24.56 or PBIT = 35.08

Chandra: Financial Management, 9e

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Geeplast Limited’s present capital structure consists of 15 million equity shares of

Rs.10 each. It requires Rs.40 million of external financing. It is considering two

alternatives:
Alternative 1 : Issue of 2 million equity shares of Rs.10 par at Rs.15 each
and 1 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.

Alternative 2 : Issue of 1 million equity shares of Rs.10 par at Rs.15 each and Rs.25
million of debentures carrying an interest rate of 11 percent

The company’s tax rate is 30 percent ? What is the EPS-PBIT indifference point ?

a. Rs.4.28 million
b. Rs.3.50 million
c. Rs.5.17 million
d. Rs.2.85 million
e. None of the above
Working :
Alternative 1

(PBIT – 0) (1 – 0.3) – 1

EPS = ------------------------------

17

Alternative 2

(PBIT – 2.75) (0.7)

EPS = ---------------------------

11

0.7PBIT – 1 0.7PBIT – 1.925

------------------ = -----------------------

17 11

7.7PBIT – 11 = 11.9PBIT – 32.725

4.2PBIT = 21.725 or  PBIT = 5.17

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4.

GSM Limited’s present capital structure consists of 40 million equity shares of Rs.10 each. It requires
Rs.80 million of additional financing. It is considering two alternatives:
Alternative 1 : Issue of 4 million equity shares of Rs.10 par at Rs.15 each
and 2 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2 : Issue of 3 million equity shares of Rs.10 par at Rs.15 each and
debentures for Rs.35 million carrying an interest rate of 12 percent

The company’s tax rate is 35 percent? What is the EPS-EBIT indifference point?

a. Rs. 20.85 million

b. Rs. 52.49 million
c. Rs.35.60 million
d. Rs.40.90 million
e. None of the above
Working:
Alternative 1

(PBIT – 0) (1 – 0.35) – (2)

EPS =

44

Alternative 2

(PBIT – 4.2) (1 - 0.35)

EPS =

43

0.65 PBIT – 2 = 0.65 PBIT – 2.73

44 43

27.95 PBIT – 86 = 28.6 PBIT – 120.12

0.65 PBIT = 34.12

 PBIT = 52.49

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5. Sun Limited’s present capital structure consists of 60 million equity shares of Rs. 10 each. It requires Rs. 80
million of additional financing. It is considering two alternatives:
Alternative 1: Issue of 5 million equity shares of Rs. 10 par at Rs. 12 each and 2 million
preference shares of Rs. 10 par, carrying a dividend rate of 10 percent.
Alternative 2: Issue of 4 million equity shares of Rs. 10 par at Rs. 15 each and
debentures for Rs. 20 million carrying an interest rate of 17 percent

The company’s tax rate is 35 percent? What is the EPS-EBIT indifference point?

(a) Rs. 24.08 million

(b) Rs. 45.85 million
(c) Rs. 65.25 million
(d) Rs. 50.20 million
(e) None of the above

Alternative 1

(EBIT – 0) (1 – 0.35) – (2)

EPS =

65

Alternative 2

(EBIT – 3.4) (1 - 0.35)

EPS =

64

0.65 EBIT – 2 0.65 EBIT – 2.21

65 64

42.25 EBIT – 143.65 = 41.60 EBIT – 128

0.65 EBIT = 15.65

 EBIT = 24.08

Chandra: Financial Management, 9e

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6. Sagar Limited’s present capital structure consists of 50 million equity shares of Rs. 10
each. It requires Rs. 75 million of additional financing. It is considering two alternatives:

Alternative 1 : Issue of 4 million equity shares of Rs. 10 par at Rs. 15 each and
1.5 million preference shares of Rs. 10 par, carrying a dividend
rate of 8 percent.
Alternative 2 : Issue of 3 million equity shares of Rs. 10 par at Rs. 15 each and
debentures for Rs. 30 million carrying an interest rate of 12
percent.

The company’s tax rate is 30 percent? What is the EPS-EBIT indifference point?

(a) Rs. 88.00 million

(b) Rs. 90.38 million
(c) Rs. 103.54 million
(d) Rs. 110.46 million
(e) None of the above

Working:
Alternative 1

(PBIT – 0) (1 – 0.30) – 1.2

EPS =

54

Alternative 2

(PBIT – 3.6) (1 - 0.30)

EPS =

53

0.7 PBIT – 1.2 0.7 PBIT – 2.52

54 53

37.1 PBIT – 63.6 = 37.8 PBIT – 136.08

0.7 PBIT = 72.48

 PBIT = 103.54

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7 Hindustan Limited’s present capital structure consists of 80 million equity shares of Rs. 10
each. It requires Rs. 100 million of additional financing. It is considering two alternatives:

Alternative 1 : Issue of 5 million equity shares of Rs. 10 par at Rs. 16 each and
2 million preference shares of Rs.10 par, carrying a dividend rate
of 10 percent.
Alternative 2 : Issue of 4 million equity shares of Rs. 10 par at Rs. 16 each and
debentures for Rs. 36 million carrying an interest rate of 11
percent.

The company’s tax rate is 33 percent? What is the EPS-EBIT indifference point?

a. Rs. 68.20 million

b. Rs. 85.85 million
c. Rs. 92.38 million
d. Rs. 53.10 million
e. None of the above
Working:
Alternative 1

(PBIT – 0) (1 – 0.33) – 2

EPS =

85

Alternative 2

(PBIT – 3.96) (1 - 0.33)

EPS =

84

0.67 PBIT – 2 0.67 PBIT – 2.6532

85 84

56.28 PBIT – 168 = 56.95 PBIT – 225.522

0.67 PBIT = 57.522 or PBIT = 85.85

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8. Phoenix Limited’s present capital structure consists of 10 million equity shares of

Rs.10 each. It requires Rs.40 million of external financing. It is considering two

alternatives:
Alternative 1 : Issue of 2 million equity shares of Rs.10 par at Rs.15 each
and 1 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2 : Issue of 1 million equity shares of Rs.10 par at Rs.15 each and Rs.25
million of debentures carrying an interest rate of 12 percent

The company’s tax rate is 30 percent ? What is the EPS-PBIT indifference point ?

a. Rs.18.50 million
b. Rs.20.29 million
c. Rs. 9.25 million
d. Rs.12.90 million
e. None of the above
Working :
Alternative 1
(PBIT – 0) (1 – 0.3) – 1

EPS =

12

Alternative 2
(PBIT – 3) (0.7)

EPS =

11

0.7 PBIT – 1 0.7 PBIT – 2.1

= =
12 11

7.7 PBIT – 11 = 8.4 PBIT – 25.2

0.7 PBIT = 14.2

 PBIT = 20.29

9.

BGM Limited’s present capital structure consists of 20 million equity shares of

Chandra: Financial Management, 9e
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Rs.10 each. It requires Rs.60 million of external financing. It is considering two

alternatives:
Alternative 1 : Issue of 3 million equity shares of Rs.10 par at Rs.15 each
and 1.5 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.

Alternative 2 : Issue of 2 million equity shares of Rs.10 par at Rs.15 each and
debentures for Rs.30 million carrying an interest rate of 11 percent

The company’s tax rate is 35 percent ? What is the EPS-PBIT indifference point ?

a. Rs.42.05 million
b. Rs.30.80 million
c. Rs.29.20 million
d. Rs.25.13 million
e. None of the above

Working :
Alternative 1

( PBIT – 0) (1 – 0.35) – 1.5

EPS =
23

Alternative 2

( PBIT – 3.3) (1 – 0.35)

EPS =
22

0.65 PBIT – 1.5 = 0.65 PBIT – 2.145

23 22

14.3 PBIT – 33 = 14.95 PBIT – 49.335

0.65 PBIT = 16.335

PBIT = 25.13

Chandra: Financial Management, 9e

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10.. Ageil Limited’s present capital structure consists of 50 million equity shares of Rs.10 each. It requires Rs.90
million of additional financing. It is considering two alternatives:
Alternative 1 : Issue of 5 million equity shares of Rs.10 par at Rs.14 each
and 2 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2 : Issue of 3 million equity shares of Rs.10 par at Rs.15 each and
debentures for Rs.45 million carrying an interest rate of 12 percent

The company’s tax rate is 35 percent? What is the EPS-EBIT indifference point?

a. Rs. 82.90 million

b. Rs. 42.85 million
c. Rs. 78.29 million
d. Rs. 66.96 million
e. None of the above
Working:
Alternative 1

(PBIT – 0) (1 – 0.35) – (2)

EPS =

55

Alternative 2

(PBIT – 5.4) (1 - 0.35)

EPS =

53

0.65 PBIT – 2 0.65 PBIT – 3.51

= -------------------

55 53

34.45 PBIT – 106 = 35.75 PBIT – 193.05

1.30 PBIT = 87.05  PBIT = 66.96

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11. Fax Limited’s present capital structure consists of 80 million equity shares of Rs. 10 each. It requires
Rs. 92 million of additional financing. It is considering two alternatives:

Alternative 1 : Issue of 6 million equity shares of Rs. 10 par at Rs. 12 each and
2 million preference shares of Rs.10 par, carrying a dividend rate
of 7 percent.
Alternative 2 : Issue of 5 million equity shares of Rs. 10 par at Rs. 15 each and
debentures for Rs. 17 million carrying an interest rate of 14
percent.

The company’s tax rate is 35 percent? What is the EPS-EBIT indifference point?

a. Rs. 22.00 million

b. Rs. 25.85 million
c. Rs. 30.00 million
d. Rs. 35.10 million
e. None of the above

Working:
Alternative 1

(PBIT – 0) (1 – 0.35) – 1.4

EPS =

86

Alternative 2

(PBIT – 2.38) (1 - 0.35)

EPS =

85

0.65 PBIT – 1.4 0.65 PBIT – 1.55

86 85

55.90 PBIT – 133.3 = 55.25 PBIT – 119

0.65 PBIT = 14.3  PBIT = 22

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12. Omax Limited’s present capital structure consists of 20 million equity shares of Rs. 10 each. It
requires Rs. 100 million of additional financing. It is considering two alternatives:

Alternative 1 : Issue of 3 million equity shares of Rs. 10 par at Rs. 20 each and 4
million preference shares of Rs.10 par, carrying a dividend rate of 10
percent.

Alternative 2 : Issue of 4 million equity shares of Rs. 10 par at Rs. 20 each and
debentures for Rs. 20 million carrying an interest rate of 11 percent.

The company’s tax rate is 33 percent? What is the EPS-EBIT indifference point?

a. Rs. 92.68 million

b. Rs. 100.52 million
c. Rs. 110.30 million
d. Rs. 115.46 million
e. None of the above
Working:
Alternative 1

(PBIT – 0) (1 – 0.33) – 4.0

EPS =

23

Alternative 2

(PBIT – 2.2) (1 - 0.33)

EPS =

24

0.67 PBIT – 4 0.67 PBIT – 1.474

23 24

16.08 PBIT – 96 = 15.41 PBIT – 33.902

0.67 PBIT = 62.098

 PBIT = 92.68

Chandra: Financial Management, 9e

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13. Oriental Limited’s present capital structure consists of 20 million equity shares of Rs. 10 each. It
requires Rs. 100 million of additional financing. It is considering two alternatives:

Alternative 1 : Issue of 4 million equity shares of Rs. 10 par at Rs. 22 each and
1.2 million preference shares of Rs.10 par, carrying a dividend
rate of 11 percent.
Alternative 2 : Issue of 3 million equity shares of Rs. 10 par at Rs. 22 each and
debentures for Rs. 34 million carrying an interest rate of 12
percent.

The company’s tax rate is 32 percent? What is the EPS-EBIT indifference point?

a. Rs. 32.88 million

b. Rs. 41.73 million
c. Rs. 65.25 million
d. Rs. 53.27 million
e. None of the above
Working:
Alternative 1

(PBIT – 0) (1 – 0.32) – 1.32

EPS =

24

Alternative 2

(PBIT – 4.08) (1 - 0.32)

EPS =

23

0.68 PBIT – 1.32 0.68 PBIT – 2.7744

24 23

15.64 PBIT – 30.36 = 16.32 PBIT – 66.5856

0.68 PBIT = 36.2256:  PBIT = 53.27

Chandra: Financial Management, 9e

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Chandra: Financial Management, 9e

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