Unit 3 Financing Decission 6 Mks & 14 MKS PROB ONLY QUESTION
Unit 3 Financing Decission 6 Mks & 14 MKS PROB ONLY QUESTION
Financing Decision
1. Calculate two companies in terms of its financial operating leverages and
Combined leverages.
Firm A Firm B
Sales 20, 00,000 30, 00,000
1. A Company has EBIT of Rs. 4,80,000 and its capital structure consists of
the following securities:
Rs.
The company is facing fluctuation in its sales. What would be the change in EPS?
3. X Ltd. Is capitalized with Rs.10, 00,000 divided into 1, 00,000 equity shares
of Rs.10/-. The management desires to raises another Rs.10, 00,000 to
finance a major expansion programme.
5. Somu Ltd company ., has an equity share capital for Rs. 10, 00,000
dividend into shares of Rs. 100 each. It wishes to raise further Rs. 6, 00,000
for modernization. The company plans the following financing schemes:
e) All equity shares.
f) Rs. 2, 00,000 in equity shares and Rs.4, 00,000 in 10% debentures.
g) All in 10% debentures.
h) Rs. 2, 00,000 in equity shares and Rs. 4, 00,000 in 8% preference shares.
The company’s EBIT is Rs.3, 00,000. The corporate tax is 50%. Calculate
EPS in each case. Give a comment as to which capital structure is suitable.
7% debentures 4, 00,000
The company earns 12% on its capital. The income tax rate is 50%. The company
requires a sum, of Rs. 12, 50,000 to financeits expansion programme for which the
following alternatives are available:
It is estimated that the P/E ratios for equity, preference and debenture financing would
be 21.4,17 and 15.7 respectively.
Which of the three following alternatives would you recommend and why?
7. The existing capital structure of ABCLtd., is as follows.
7% debentures 25,00,000
The company earns 12% on its capital. The income tax rate is 50%. Company
wants to raise Rs. 25, 00,000 for its expansion project for which it is considering
following alternatives:
Projected that the price/earnings ratio in the case of equity, preference and
debentures financing would be 20, 17 and 16 respectively.
The company earns 12% on its capital. The income tax rate is 30%. Company
wants to raise Rs. 37, 50,000 for its expansion project for which it is considering
following alternatives:
The company’s total assets turnover ratio is 5 times. Its fixed operating
expenses are Rs 10, 00,000 and variable cost is 30%. Income tax rate is
50%.
1. Calculate all the leverages.
2. Show the likely level of EBIT. if EPS is
a) 5 b) 3 c) 2.