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    Capital Structure

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    Shripradha Acharya
    The document discusses the capital structure of Automobile Ltd, which wishes to raise additional capital of Rs. 300,000. It considers four financial plans: issuing only equity shares, a mix of equity and debentures, only debentures, or a mix of equity and preference shares. It calculates EPS under each plan, finding that Plan III (only debentures) yields the highest EPS of Rs. 17. Therefore, Plan III is recommended as the most suitable capital structure from the shareholders' perspective.

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    Capital Structure

    Uploaded by

    Shripradha Acharya
    22 views7 pages
    The document discusses the capital structure of Automobile Ltd, which wishes to raise additional capital of Rs. 300,000. It considers four financial plans: issuing only equity shares, a mix of equity and debentures, only debentures, or a mix of equity and preference shares. It calculates EPS under each plan, finding that Plan III (only debentures) yields the highest EPS of Rs. 17. Therefore, Plan III is recommended as the most suitable capital structure from the shareholders' perspective.

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    Original Title

    CAPITAL STRUCTURE

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    The document discusses the capital structure of Automobile Ltd, which wishes to raise additional capital of Rs. 300,000. It considers four financial plans: issuing only equity shares, a mix of equity and debentures, only debentures, or a mix of equity and preference shares. It calculates EPS under each plan, finding that Plan III (only debentures) yields the highest EPS of Rs. 17. Therefore, Plan III is recommended as the most suitable capital structure from the shareholders' perspective.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    22 views7 pages

    Capital Structure

    Uploaded by

    Shripradha Acharya
    The document discusses the capital structure of Automobile Ltd, which wishes to raise additional capital of Rs. 300,000. It considers four financial plans: issuing only equity shares, a mix of equity and debentures, only debentures, or a mix of equity and preference shares. It calculates EPS under each plan, finding that Plan III (only debentures) yields the highest EPS of Rs. 17. Therefore, Plan III is recommended as the most suitable capital structure from the shareholders' perspective.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 7

    UNIT- 3 CAPITAL STRUCTURE

    CONTINUE………..
    QP.2014
    PROBLEM 26
    Automobile ltd has an equity share capital of Rs.500000 divided into
    shares of Rs.100each. It wishes to raise further capital of rs.300000 for
    expand the business. The company has taken the following financial
    plans:
     All equity shares
     Rs.100000 in equity shares and rs.200000 in 10% debentures
     All in 10% debentures
     Rs.100000 in equity shares and Rs.200000 10% preference
    shares.
    The company EBIT Rs.200000 and corporate tax is 50%.
    Calculate EPS in each case. And give comment as to which
    capital structure is suitable.

    Solution:
    Calculation of EPS under various capital structure
    Particulars Plan I Plan II Plan III Plan IV
    300000eq.sh 100000eq+20000 300000 1L Eq sh
    0 10% debs 10%debs +2L 10% prfe
    EBIT 200000 200000 200000 200000
    Less: interest on debs nil 20000 30000 nil
    (200000X10%) (300000x10
    %)
    EBT 200000 180000 170000 200000
    Less: Tax on 50% 100000 90000 85000 100000

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    EAT/PAT 100000 90000 85000 100000


    Less: Preference nil nil nil 20000
    dividend (200000X10%)
    Amount available to 100000 90000 85000 80000
    equity shareholders
    Number of equity 8000 6000 5000 6000
    share
    EPS 100000/8000 90000/6000 85000/5000 80000/6000
    EPS 12.5 15 17 13.3

    CALACULATION OF NO OF EQUITY SHARE


    PLAN EXISTING NEW TOTAL
    1 5000 3000 8000
    2 5000 1000 6000
    3 5000 nil 5000
    4 5000 1000 6000

    Recommend:
    In case of plan III Where additional capital of Rs.300000 funds collected by the
    issue of debentures. EPS is maximum is Rs.17. therefore Plan III is recommended
    and it’s suitable to shareholder point of view.

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    PROBLEM 27:-
    QP. 2018
    Alfa ltd is capitalized with Rs.1000000 divided 10000 equity shares of Rs.100
    each. The management to raise additional capital Of Rs.1000000 for the
    following financial plan:
     All in equity shares
     All in debentures carrying 8% interest
     Rs.500000 equity shares and Rs.500000 in debentures carrying 10%
    interest.
     Rs.500000 in equity shares and 500000 in10% preference shares.
    You are required to calculate EPS. If the EBIT is Rs.480000 and If EBIT is
    Rs.600000 tax @ 50%.projected that price earnings ratio is 20, 17, 16 and 10
    respectively.
    Calculate the market price per share.

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    Solution:
    1. If the EBIT Rs.480000
    Calculation of EPS under various capital structure
    Particulars Plan I Plan II Plan III Plan IV
    1000000eq.sh 1000000 8% 500000eq.sh+5 5L Eq sh
    debs 00000 +5L 10% prfe
    10%debs
    EBIT 480000 480000 480000 480000
    Less: Interest on debs nil 80000 50000 nil
    EBT 480000 400000 430000 480000
    Less: TAX@50% 240000 200000 215000 240000
    EAT/PAT 240000 200000 215000 240000
    Less: Preference nil nil nil 50000
    dividend
    Amount available to 240000 200000 215000 190000
    equity shareholders
    No. of equity share 20000(10000+ 10000(10000) 15000(10000+ 15000(10000+
    10000) 5000) 5000)
    EPS 240000/20000 200000/10000 215000/15000 190000/15000
    EPS 12 20 14.3 12.6
    PER 20 17 16 10
    MPS=EPSXPER 12X20 20X17 14.3X16 12.6X10
    240 340 228 126

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    1. If the EBIT Rs.600000


    Calculation of EPS under various capital structure
    Particulars Plan I Plan II Plan III Plan IV
    1000000eq.sh 1000000 8% 500000eq.sh+5 5L Eq sh
    debs 00000 +5L 10% prfe
    10%debs
    EBIT 600000 600000 600000 600000
    Less: Interest on debs nil 80000 50000 nil
    EBT 600000 520000 550000 600000
    Less: TAX@50% 300000 260000 275000 300000
    EAT/PAT 300000 260000 275000 300000
    Less: Preference nil nil nil 50000
    dividend
    Amount available to 300000 260000 275000 250000
    equity shareholders
    No. of equity share 20000 10000 15000 15000
    EPS 300000/20000 260000/10000 275000/15000 250000/15000
    EPS 15 26 18.3 16.6
    PER 20 17 16 10
    MPS=EPSXPER 15X20 26X17 18.3X16 16.6X10
    300 442 292.8 166

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    PROBLEM NO 28
    QP 2015 FOR 14 MARKS
    R and L AUTO LTD. Has an equity share capital of Rs.500000 divided in to
    shares of Rs.100 each. It wishes to raise further Rs.300000 for modernization.
    The company plans the following financing schemes.
     All equity shares
     Rs.100000 in equity shares and Rs.200000 in 10% debentures
     All in 10% debentures
     Rs.100000 equity shares and Rs.200000 in 10% preference shares.
    The company EBIT is Rs.200000. the corporate Tax is 50%.
    Calculate EPS in each case. Give a comment as to which capital structure
    is suitable.

    Solution:
    Calculation of EPS under various capital structure
    Particulars Plan I Plan II Plan III Plan IV
    300000eq.sh 100000eq+20000 300000 1L Eq sh
    0 10% debs 10%debs +2L 10% prfe
    EBIT 200000 200000 200000 200000
    Less: interest on debs nil 20000 30000 nil
    (200000X10%) (300000x10
    %)
    EBT 200000 180000 170000 200000
    Less: Tax on 50% 100000 90000 85000 100000
    EAT/PAT 100000 90000 85000 100000
    Less: Preference nil nil nil 20000
    dividend (200000X10%)

    SMT.NAGASHREE R PUJARI SIMS


    UNIT- 3 CAPITAL STRUCTURE

    Amount available to 100000 90000 85000 80000


    equity shareholders
    Number of equity 8000 6000 5000 6000
    share
    EPS 100000/8000 90000/6000 85000/5000 80000/6000
    EPS 12.5 15 17 13.3

    Recommend:
    In case of plan III Where additional capital of Rs.300000 funds collected by the
    issue of debentures. EPS is maximum is Rs.17. therefore Plan III is recommended
    and it’s suitable to shareholder point of view.

    SMT.NAGASHREE R PUJARI SIMS

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