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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
Viyo Ltd.' is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. The earnings per share in the previous year was Rs 0.50. For diversification, the company requires additional capital of Rs 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit of Rs 8 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 you calculations clearly.
b. Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.
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What is meant by Trading on Equity?
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Cash flow position
Explain the following as factors affecting the choice of capital structure:
Cost of equity
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:
Flexibility
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