Exercise 2. Dhofar Cattle feed Ltd expects that its earnings before interest and taxes (EBIT) in the current year would amount to RO 30000. The firm has 12% bonds aggregating RO 180000 while the 10% preference shares amount to RO 80000. What would be the earnings per share (EPS)? Assuming the EBIT being i. RO 30,000, and ii. RO 24,000 i. RO 32,000, how would the EPS be affected? The firm can be assumed to be in the 20% tax bracket. The number of outstanding Common Stock/Ordinary shares is 2000 Solution Exercise 2....tareeqa 1 ЕBIT I EBIT II EBIT III EARNINGS BEFORE INTEREST AND TAXES (EBIT) LESS INTEREST EARNING AFTER INTEREST BEFORE TAX (EAIBT) LESS TAXES .%) EARNING AFTER TAXES (EAT) LESS PREFERENCE DIVIDEND EARNINGS AVAILABLE FOR COMMON STOCK HOLDERS No. OF COMMON STOCK HOLDERS EARNING PER SHARE
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.
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