Problem 7: The existing capital structure of ABC ltd is as follows: Equity shares of. Rs. 200 each Rs. 3000000 Retained earnings Rs. 750000 10% Preference shares Rs. 1875000 8% Debentures Rs. 1875000 The company earns 12% on capital. The income tax rate is 40%. The company wants to raise Rs. 1875000 for its expansion project for which it is considering following alternatives: a. Issue of 15000 equity shares at a premium of Rs. 125 per share b. Issue of 7% Preference shares c. Issue of 9% Debentures. Calculate earnings per share and market price per share
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- Problem 5: A Company has a capital of Rs. 400000 divided into shares of Rs. 10 Each. It has major expansion programme requiring an investment of another Rs. 200000. The management is considering the following alternatives for raising this amount: a. Issue of 20000 shares of Rs. 10 each b. Issue of 20000, 12% Preference shares of Rs. 10 each c. Issue of 10% Debentures of Rs. 200000 The company has a EBIT of Rs. 120000 pa. You are required to calculate the effect of each of the above modes of financing on the EPS presuming tax rate to be 50%, EBIT continues to be the same even after expansion and EBIT increases by 40%2. A company has share capital of Kshs 20 million and is planning to invest an additional fund of Kshs 16,000,000 towards its expansion programme. Suggest the best option from the following, from a tax point of view: 1. To issue share capital of Kshs 16,000,000. 2. To borrow Kshs 4,000,000 @ 18% pa and to issue debentures of Kshs 4,000,000 @ 11% pa and the balance amount be collected by issuing shares in the public. 3. To issue debentures for Kshs 10,000,000 @ 11% pa and the balance be collected by issuing shares in the public. 4. Rate of return is 30% before paying any interest and tax. Rate of tax is 30%Q.1 A) A Company need Rs. 31,25,000 for the construction for new plant the following three plans are feasible: i) The company may issue 3,12,500 equity shares at Rs.10 per shares ii) The Company may issue 1,56,250 ordinary equity shares at Rs. 10 per shares and 15,625 debentures of Rs. 100 denominations bearing 8% rate of dividend The Company may issue 1,56,250 equity shares at Rs. 10 per shares and 15,625 preference shares of Rs. 100 per share bearing 8% rate of dividend a) If the company's earnings before interest and taxes are Rs. 63,000, Rs.1,25,500, Rs.2,50,500; Rs.3,75,500 and Rs.6,25,000 what are the earnings per share under each of three financial plans? Assume a corporate income tax rate of 40%. b) Which alternative would you recommend and why? iii)
- Question is Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%. Component Scenario 1 Scenario 2 Cost of Capital Tax Rate Debt $4,000,000.00 $1,000,000.00 8% 30% Preferred Stock 1,200,000.00 1,500,000.00 10% Common Stock 1,000,000.00 3,700,000.00 13% Total $6,200,000.00 $6,200,000.00 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Senario 1 weight % Senario 2 Weight% Senario 1 Weighted Cost Senario 2 weight cost Cost of capital Tax Rate Debt 64.52 16.13…Company’s capital structure consists of the following: Particulars Rs. Equity Shares of Rs. 100 each Retained Earnings 9% Preference shares 7% Debenture 20 lakhs 10 lakhs 12 lakhs 8 Lakhs Total 50 Lakhs The company earns 12% on capital. The Income Tax rate is 50%. The company requires a sum of Rs. 25 lakhs to finance expansion programme for which following alternatives are available to it. (i) Issue of 20,000 Equity Shares at a premium of Rs. 25 per share (ii) Issue of 10% Preference shares (iii) Issue of 8% Debentures It is estimated that P/E ratio in the cases of equity, preference and debenture financing would be 21.4, 17 and 15.7 respectively. EPS of case (ii) Answer 1 EPS of case (i) Answer 2 MPS of case (i) Answer 3 Which option to select as per EPS Answer 4 MPS of case (iii) Answer 5 EPS of case (iii) Answer 6 MPS of case (ii) Answer 7Q.An all-equity company is considering borrowing $10,000,000 and using the borrowed funds to repurchase shares. The company's cost of equity is 9%. EBIT is expected to be $3,600,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. If the company proceeds with the capital restructing, what will be the value of the company according to M&M Proposition I without taxes?
- Problem 1 Assume that ABC Corporation earns a net income of 10 million for the current period. The corporation also needs Br 8 million for new investments for the next period. Suppose the target capital structure of debt to equity ratio is one to three ratios. Based on this, determine the amount of dividend to be paid based on the residual dividend policy? Beob omAssume a company has 12,5 million shares in issue. The current market price per share is R65 per share. The company has the opportunity to invest in a project with a total value of R45 million. The net present value of the project is R35 million. What will the companies share price be if capital markets fully reflect the value of undertaking the project? 1. R67,50 02. R67,80 O 3. R65 O 4. R68Question 13 (Group 12 & Group 4 [Acc]) Assume that in the optimal capital structure: wD = 40%, wC = 50%, wP = 10%. Of the 50% that comes from common stock 80% will be generated internally through retained earnings; 20% through newly issued equity. Now we just have to estimate the costs of the individual funding sources, the rates. The marginal corporate tax rate is 30%. Use the following information to find rates: If new debt were issued it would have a coupon rate of 9%, a maturity of 10 years, and a face value of Tshs 1,000. It is expected that since investor's opportunity cost is also 9%, that the new debt could be sold at face value. Issue costs are Tshs 30/share. ii. Newly issued preferred stock would have a par value of Tshs 50, a dividend of Tshs 6/share, and flotation costs of Tshs 1.75/share. Assume that this newly issued preferred stock would be issued at par. i. The firm just issued a Tshs 5 dividend. Dividends are expected to grow at a rate of 10%/year, indefinitely. The…
- Problem 1 - Cost of Capital Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at a 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share…QUESTION 4 A Company with net operating earnings of shs 300,000 is attempting to evaluate a number of possible capital structures, given below. Which of the capital structures will you recommend and why? Show your analysis. Debt After tax-Cost of Cost of equity debt (%) (%) Capital structure 1 2 3 4 5 300,000 10 400,000 10 500,000 11 600,000 12 700,000 14 12 12.5 13.5 15 18 =ABC Ltd. needs Rs 500 lacs for an expansion plan that is expected to yield 15% return on assets. Currently its return on asset is 12% and the firm is all equity funded. For expansion it has alternatives of funding the entire expenditure either through debt or equity. Following information is available: Nos. of shares already existing 20 lacs Price at which the shares can be issued (Rs) Rs 50 Existing interest Rs 30 lacs Interest rate on debt 10% Tax rate 40% Find out the new EPS with equity and debt financing. Also find at what level of earnings the firm is indifferent to mode of financing.