Q.1. Bhaskar manufacture Ltd. has equity share capital of Rs. 5,00,000 (face value Rs. 100). To meet the expenditure of an expansion program, the company wishes to raise Rs. 3,00,000 and is having following four alternative sources to raise the funds :
Plan A : To have full money from the issue of equity shares.
Plan B : To have Rs. 1,00,000 from equity and Rs. 2,00,000 from borrowings from the financial institutions @ 10% per annum.
Plan C : Full money from borrowings @ 10% per annum.
Plan D : Rs. 1,00,000 in equity and Rs.2,00,000 from 8% preference shares.
The company is having present earnings of Rs. 1,50,000. The corporate tax:- 50%. Select a suitable out of the above four plans to raise the required funds.
Ans. EPS-Plan A- Rs.9.38, Plan B- Rs.10.83, Plan C- Rs.12.00, Plan D- Rs.9.83
Q.2. A firm is considering alternative proposals to finance its expansion plan of Rs. 4,00,000.Two such proposals are :
(i) Issue of 15% loans of Rs.2,00,000 and issue of 2,000 equity shares of 2,000 equity of 100 each, and
(ii) Issue of 4,000 equity shares of 100 each.
Given the tax rate at 50% and assuming EBIT of RS.70,000 and Rs.80,000, which alternative is better?
Also compute the indifference level of EBIT of the two financial plans.
Ans. Plan I – 10 , 12.5 , Plan II – 8.75 , 10
Q.3. MC Ltd. Is planning an program which will require Rs.30 crores and can be funded through one of the following options :
1.Issue further equity shares of Rs.100 each at par.
2.Raise a 15% loan, and
3.Issue 12% preference shares.
The present paid up capital is 60 crores and the annual EBIT is Rs.12 crores. The tax rate may be taken at 50%. After the expansion plan is adopted, the EBIT is expected to be Rs.15 crores.
Calculate the EPS under all the three financing options indicating the alternative giving the highest return to the equity shareholders. Also determine the indifference point between the equity share capital and the debt financing (I .e. , option 1 and option 2 above
Ans. 8.33, 8.75, 6.50
Q.4. The operating income of a textile firm amounts Rs.1,86,000. It pays 50% tax on its income. Its capital structure consists of the following:
|15% preference shares||1,00,000|
|Equity shares (Rs.100 each)||4,00,000|
(i) Determine the firm’s EPS.
(ii) Determine the % change in EPS associated with 30% change (both increase and decrease) in EBIT.
(iii) Determine the degree of financial leverage at the current level of EBIT.
(iv) What additional data to you need to computed operating as well as combined leverage?
Ans. EPS Rs.10.75 and Financial leverage 2.16
Q.5. A company requires capital funds of Rs. 5 crores and has two options: (i) To raise the amount by the issue of 15% debentures, and (ii) To issue equity shares at a rate of Rs. 20 per share. It already has 40 lacs equity shares issued and debt financing of Rs. 6 crores at the rate of 12%. Find out the expected EPS under both financing options at the given EBIT levels of Rs.2 crores and Rs. 7.5 crores. What should be choice of the company given that the applicable tax rate is 50%.
Ans. EPS of Rs. 0.67 and 7.54 for debt financing; and EPS of Rs. 0.98 and 5.22 for equity financing
Q.6. ABC Ltd. is considering a capital structure of Rs. 10,00,000 for which various mutually exclusive set of option are available. Calculate the difference level of EBIT between the following alternative sets :
(i) Equity share capital of Rs. 10,00,000, or 15% Debentures of Rs. 5,00,000 plus equity share capital of Rs. 5,00,000.
(ii) Equity share capital of Rs. 10,00,000, or 13% Pref. shares capital of Rs. 5,00,000plus Equity share capital of Rs. 5,00,000.
(iii) Equity share capital of Rs. 6,00,000 plus 15% debentures of Rs. 4,00,000, or Equity share capital of Rs. 4,00,000 plus 13% Pref. shares capital of Rs.2,00,000 plus 15% debenture of Rs. 4,00,000.
(iv) Equity share capital of Rs. 8,00,000 plus 13% Pref. shares capital of Rs. 2,00,000, or Equity share capital of Rs. 4,00,000 plus 13% Pref. shares capital of Rs. 2,00,000 plus 15% debentures of Rs. 4,00,00.
The issue price of equity shares may be taken at per i.e., indifference point of EBIT for different sets.