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  • Capital Structure Theories Problems 13.4.24

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    Capital structure

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    Capital Structure theories Problems 13.4.24

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    Capital structure

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    6 views1 page

    Capital Structure Theories Problems 13.4.24

    Uploaded by

    pgkathiravan007
    Capital structure

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 1

    CAPITAL STRUCTURE THEORIES

    1) ABC Ltd., needs Rs. 30,00,000 for the installation of a new factory. The
    new factory expects to yield annual earnings before interest and tax
    (EBIT) of Rs.5,00,000. In choosing a financial plan, ABC Ltd., has an
    objective of maximizing earnings per share (EPS). The company proposes
    to issuing ordinary shares and raising debit of Rs. 3,00,000 and
    Rs.10,00,000 of Rs. 15,00,000. The current market price per share is Rs.
    250 and is expected to drop to Rs. 200 if the funds are borrowed in
    excess of Rs. 12,00,000. Funds can be raised at the following rates

    –up to Rs. 3,00,000 at 8%

    –over Rs. 3,00,000 to Rs. 15,000,00 at 10%

    –over Rs. 15,00,000 at 15%

    Assuming a tax rate of 50% advise the company.

    ( (I) EPS : Rs. 22.03 (II) EPS : Rs. 25 (III) EPS : Rs. 18.33)
    [The secure alternative which gives the highest earnings per share is the
    best. Therefore the company is advised to revise Rs. 10,00,000 through
    debt amount Rs. 20,00,000 through ordinary shares.]

    2) Compute the market value of the firm, value of shares and the average
    cost of capital from the following information.

    Net operating income Rs. 1,00,000

    Total investment Rs. 5,00,000

    Equity capitalization Rate:

    (a) If the firm uses no debt ,10%

    (b) If the firm uses Rs. 2,50,000 debentures, 11%

    (c) If the firm uses Rs. 4,00,000 debentures, 13%

    Assume that Rs. 5,00,000 debentures can be raised at 6% rate of interest


    whereas Rs. 4,00,000 debentures can be raised at 7% rate of interest.

    (Average Cost of Capital = Earnings /Value of the Firm)

    (a) 10% (b) 9.78% (c) 10.48% | Value = Market value of Equity +debt )

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