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Capital Structure Theories Problems 13.4.24
Capital Structure Theories Problems 13.4.24
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
( (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.
(a) 10% (b) 9.78% (c) 10.48% | Value = Market value of Equity +debt )