Scribd
Upload
24 views1 page

Assignment On CS

The document discusses four alternative plans for a company to raise additional capital of Rs. 100,000 through equity, debt, or a combination. It asks which plan would provide the maximum earnings per share (EPS) considering costs like interest rates. It also discusses two other cases involving calculating EPS under different capital raising options.

Uploaded by

kimice5490
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
24 views1 page

Assignment On CS

The document discusses four alternative plans for a company to raise additional capital of Rs. 100,000 through equity, debt, or a combination. It asks which plan would provide the maximum earnings per share (EPS) considering costs like interest rates. It also discusses two other cases involving calculating EPS under different capital raising options.

Uploaded by

kimice5490
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1. ABC ltd. has existing equity share capital of Rs. 3,00,000 (face value 100 each).

It has
decided to expand its business for which there is an additional capital requirement of Rs.
1,00,000. Now, it has following four alternatives sources to raise capital :-
1. Plan 1 – To raise full 1,00,000 through equity financing
2. Plan 2 – To raise 50,000 (face value of 100) through equity and 50,000 through debt
at int. rate of 10%p.a.
3. Plan 3 – To raise full 1,00,000 through debt financing @ interest rate of 10% p.a.
4. Plan 4 – To raise 50,000 through equity and 50,000 through 5% preference shares
● The expected level of EBIT is 75,000 . Tax rate is 30%. Which plan do you think it
• should go for considering the one which would provide maximum EPS?

2. A Ltd. Has a share capital of Rs .1,00,000 divided into share of Rs. 10 each. It has a major
expansion program requiring an investment of another Rs. 50,000.
The Management is considering the following alternatives for raising this amount :
Issue of 5,000 equity shares of Rs. 10 each
Issue of 5000, 12% preference shares of Rs. 10 each
Issue of 10% debentures of Rs. 50,000.
The company’s present Earning Before Interest and Tax (EBIT) are
Rs. 40,000 per annum subject to tax @ 50%.
You are required to calculate the effect of the above financial plan on the earnings per
share presuming:
(a) EBIT continues to be the same even after expansion
(b) EBIT increases by Rs. 10,000

3. Paramount Products Ltd. wants to raise Rs. 100 lakhs for a diversification project. Current
estimate of earnings before interest and taxes (BIT) from the new projects is Rs. 22 lakhs per
annum. Cost of debt will be 15% for amounts up to and including Rs. 40 lakhs, 16% for
additional amounts up to and including Rs. 50 lakhs and 18% for additional amounts above
Rs. 50 lakhs. The equity shares (face value Rs. 10) of the company have a current market
value of Rs. 40. This is expected to fall to Rs. 32 if debts exceeding Rs.50 lakhs are raised.
The following options are under consideration by the Company:
Option Equity Debt
I 50% 50%
II 60% 40%
III 40% 60%

Determine the earning per share (E.P.S.) for each option and state which option the
company should exercise. The tax rate applicable to the company is 50%.

(Ans.: EPS for Option-I is Rs.5.76, Option-Il is Rs.5.33, Option-Ill is Rs.5.04 &Option-I. is most
suitable to maximize the Earnings Per Share)

You might also like