The current capital structure of the company consists of 10,00,000 equity shares of Rs.10 each and 30,000 debentures of Rs.100 each carrying annual coupon of 12%. The company is in need of Rs.50 lakhs for expansion. It is considering two financing options. The first one is to raise the entire amount by issue of 5,00,000 equity shares at Rs.10 per share. The second option is to issue 3,00,000 equity shares at Rs.10 each and raise the remaining Rs.20 lakhs through long term debt, paying 12% interest per annum. The tax rate applicable to the company is 30%. If the EBIT after expansion is expected to be Rs.40 lakhs, which alternative will you recommend the firm? Why?

The current capital structure of the company consists of 10,00,000 equity shares of Rs.10 each and 30,000 debentures of Rs.100 each carrying annual coupon of 12%. The company is in need of Rs.50 lakhs for expansion. It is considering two financing options. The first one is to raise the entire amount by issue of 5,00,000 equity shares at Rs.10 per share. The second option is to issue 3,00,000 equity shares at Rs.10 each and raise the remaining Rs.20 lakhs through long term debt, paying 12% interest per annum. The tax rate applicable to the company is 30%. If the EBIT after expansion is expected to be Rs.40 lakhs, which alternative will you recommend the firm? Why?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Empire Ltd. needs Rs. 10,00,000 to build a new factory will yield EBIT of Rs.1,50,000 year The company has to choose between two alternative financing plans : 75% Equity and 25% debt or 50% equity & 50% debt. Under the first plan shares can be sold at Rs. 50 per share and the interest rate on debt will be 14% . under the record plan the shares can be sold for Rs.40 per share and the interest rate on debt will be 16 percent. Determine EPS for each plant assuming a 50% tax rate
A company expects to earn Rs.4.4 million in 2022, and 50% of this amount orRs.2.2 million has been allocated for distribution to common shareholders. Thereare 1.1 million shares outstanding and the market price is Rs.20 a share. Thecompany believes it can either use Rs.2.2 million to repurchase 100,000 sharesthrough a tender offer at Rs.22 a share or else pay a cash dividend of Rs.2 a share.How does this affects EPS, P/E and expected market price?
Gravity Company needs to raise $49.5 million to fund its expansion plans. The company will sell shares at a price of $28.30 in a general cash offer and the company's underwriters will charge a spread of 6 percent. How many shares need to be sold?
Supa Inc. is considering plans A and B for financing their new Systems project of OMR 6 million. Plan A involves issuance of 250,000 shares of common stock at the current market price of OMR 2 per share. Plan B involves issuance of OMR 5 million, 8% bonds at face value. Income before interest and taxes on the new plant will be OMR2.5million. Income taxes are expected to be 20%. Supa, Inc. currently has 100,000 shares of common stock outstanding. Advice Supa Inc. as to which plan would be better and why? (The answer should show clear steps and calculations).
. The modern chemical ltd. Require rs.25,00,000 for a new plant. The plant is expected to yield EBIT of rs.500,000. It has three alternative to finance the project by raising debt of rs.250,000 or rs.10,00,000 or rs.15,00,000 and the balance in each case by issuing equity shares. The company share is currently trading at rs.180 but is expected to fall to rs.120 in case the funds are borrowed in excess of rs.10,00,000. The funds can be borrowed at the rate of 10% up to rs.250,000 at 15% over rs.250,000 and up to rs.10,00,000 and 20% over rs.10,00,000 the tax rate applicable to the company is 30%. REQUIRED: WHICH FORM OF FINANCING SHOULD THE COMPANY CHOOSE?
IRIS Corp. has determined its optimal capital structure as follows. Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the…
Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why?
Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why? Please use YTM method to calculate the bond.
The Elkmont Corporation needs to raise $63.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $22 per share and the company’s underwriters charge a spread of 7.5 percent, how many shares need to be sold?
The Whistling Straits Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $21 per share and the company's underwriters charge a spread of 7 percent, how many shares need to be sold? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 1,234,567.) Number of shares offered 3,133,641
The company needs to raise $40 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $30 per share and the company's underwriters charge 12 percent spread, how many shares need to be sold?
ZEC Corporation currently has 4 million shares outstanding. The stock sells forRM35 per share. The company wants to raise RM20 million to finance a new project,the firm is considering a rights offering at RM25 per share.Calculate the following:(i) Number of shares to issued(ii) Number of rights needed to purchase one share(iii) Value of the right(c) Discuss the advantages of rights offering.

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