38. A company has 20,000 equity shares of Rs. 50 each outstanding The following is the income statement relating to the previous year as well as four proforma statements reflecting different assumptions regarding a new project The new project is expected to cost Rs. 5,00,000 in each case . Proforma Actual (pre.year) Rs. sell 10,000 equity Shares sell 10% debentures Optimi- Pessimi- Optimi- Pessimi- sticsticsticstic 12 Lacs 09 Lacs 12 Lacs 09 Lacs Sales less variable 8,00,000 expenses 2,40,000 5,60,000 Less Fixed Cost 3,00,000 ЕBIT 2,60,000 Less Interest nil Earnings after Interest 2,60,000 Less Interest 50% 1,30,000 1,30,000 6.5 EAT EPS Assuming the variable cost as a percentage of sales remainsconstant , and fixed cost with the new project is likely increase by Rs. 1,00,000 over the previous year's level , compute thetabulation which plan would you recommend to finance the new project ?.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Step by step
Solved in 3 steps with 3 images
