A Company needs Rs. 10,00,000 for expansion. The expression is expected to yield an annual EBIT of Rs. 1,60,000. In choosing a financial plan, the company has an objective of maximizing earnings per share. It is considering the possibility of issuing equity share and raising debt of Rs. 1,00,000 or Rs. 4,00,000 or Rs. 6,00,000. The current market price per share is Rs. 25 and is expected to drop to Rs. 20 if the funds are borrowed in excess of Rs. 5,00,000. Funds can be borrowed at the rates indicated below : (i) Up to Rs. 1,00,000 at 8% (ii) (ii) Over Rs. 1,00,000 up to Rs. 5,00,000 at 12% (iii) (iii) Over Rs. 5,00,000 at 18% Assume the tax rate of 50%. Determine the EPS for the three financing alternatives. Which is the best one?
Answers
Answer:
The term ‘Capital shape’ refers to the relationship between the diverse long-term sorts of financing which include debenture, choice proportion capital and fairness share capital.
Explanation:
Financing the firm’s property is a very critical hassle in each business and as a well known rule there must be a proper mix of debt and fairness capital in financing the company’s property. The use of long-term fixed hobby bearing debt and choice share capital in conjunction with fairness shares is known as financial leverage or trading on fairness. The lengthy-time period fixed hobby bearing debt is employed with the aid of a firm to earn extra from the usage of those sources than their price as a way to increase the go back on proprietor’s fairness.
it's miles authentic that capital shape can not affect the entire income of a firm but it is able to have an effect on the proportion of earnings available for equity shareholders. Say, as an instance, a company has an equity Capital of a thousand stocks of Rs. a hundred each absolutely paid and earns an average profit of Rs. 30,000. Now the employer wants to make a spread and needs some other Rs. 1,00,000.
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