Q.1 A) A Company need Rs. 31,25,000 for the construction for new plant the following three plans are feasible: i) iii) The company may issue 3,12,500 equity shares at Rs.10 per shares 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?
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.
The
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a) Either equity capital of Rs. 30,00,000 OR 12 %
Preference share capital of Rs. 10,00,000, 10 % Debentures and Rs. 10,00,000 equities. -
b) Either equity share capital of Rs. 20,00,000(Fully paid) and 10 % Debentures of Rs. 10,00,000 OR 12 % preference share capital of Rs. 10,00,000, 10 % Debentures of Rs. 8,00,000 and Rs. 12,00,000 by issuing equity shares (Fully paid).
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