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प्रश्न
Krish limited is in the business of manufacturing and exporting carpets and other home decor products. It has a share capital of ₹ 70 lacs at the face value of ₹ 100 each. Company is considering a major expansion of its production facilities and wants to raise ₹ 50 lacs. The finance manager of the company Mr. Prabhakar has recommended that the company can raise funds of the same amount by issuing 7% debentures. Given that earning per share of the company after expansion is ₹ 35 and tax rate is 30%, did Mr. Prabhakar give a justified recommendation?
Show the working.
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उत्तर
Earnings per share = ₹ 35
EPS = `("Earning after tax") / ("No. of equity shares")`
35 = `("Earning after tax") / (70,000)`
Earning after tax = ₹ 24,50,000
Interest = `50,00,000 xx7/100` = ₹ 3,50,0000
Let the Earning before tax (EBT) = x
EBT - Tax = EAT
X - 0.30 x = 24,50,000
0.70 x = 24,50,000
x = `(24,50,000)/0.70`
x = 35,00,000
Earning before tax = ₹ 35,00,000
EBIT = Earning before tax + Interest
= 35,00,000 + 3,50,000
= ₹ 38,50,000
ROI = `("EBIT")/("total Investment") × 100`
= `(38,50,000) / (1,20,00,000)× 100`
= 32.08%
As ROI (32.08%) > Rate of interest (7%). The company can choose to use trading on equity to increase its EPS. The finance manager was justified in making this recommendation.
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संबंधित प्रश्न
Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital ofRs 120 lakhs. The earning per share in the previous year wasRs 0.5. For diversification, the company requires additional capital ofRs 80 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit ofRs 16 lakhs on capital employed. It paid tax @ 40%.
a. State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly.
b. Also state any three factors that favour the issue of debentures by the company as part of its capital structure.
What is meant by Capital Structure?
Explain how 'cost of debt' affects the choice of capital structure of a company
How does cost of equity affect the choice of capital structure of a company? Explain
Explain the following as factors affecting the choice of capital structure:
Return on Investment
Explain the following as factors affecting the choice of capital structure:
Risk Consideration
Explain any four factors that affect the choice of capital structure of a company.
Write the external factors influencing capital structure.
What is meant by capital structure?
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
Owned Capital Borrowed Capital
______ refers to a situation when a company is not able to meet its fixed financial charges.
ICR = ______
State any three factors determining the choice of an appropriate capital structure of a company.
______ refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.
The reason that will justify the above situation is ______.
