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    Capital Structure Problems Assignment

    Uploaded by

    Ramya Gowda
    The document contains 7 problems related to capital structure and financial analysis. Problem 1 asks to calculate percentage changes in sales and operating profits under different cost scenarios. Problem 2 asks to calculate operating, financial and combined leverage ratios and the sales increase needed to double EBIT. Problem 3 asks to calculate capitalization, capital structure and financial structure ratios. Problem 4 asks to calculate EPS under different financing alternatives to raise capital. Problem 5 similarly asks to calculate EPS under different financing plans. Problem 6 asks to recommend the best financing alternative to raise capital based on EPS. Problem 7 asks to calculate EPS for different financing plans to raise investment capital.

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    Capital Structure Problems Assignment

    Uploaded by

    Ramya Gowda
    2K views3 pages
    The document contains 7 problems related to capital structure and financial analysis. Problem 1 asks to calculate percentage changes in sales and operating profits under different cost scenarios. Problem 2 asks to calculate operating, financial and combined leverage ratios and the sales increase needed to double EBIT. Problem 3 asks to calculate capitalization, capital structure and financial structure ratios. Problem 4 asks to calculate EPS under different financing alternatives to raise capital. Problem 5 similarly asks to calculate EPS under different financing plans. Problem 6 asks to recommend the best financing alternative to raise capital based on EPS. Problem 7 asks to calculate EPS for different financing plans to raise investment capital.

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    FM ASSIGNMENT

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    The document contains 7 problems related to capital structure and financial analysis. Problem 1 asks to calculate percentage changes in sales and operating profits under different cost scenarios. Problem 2 asks to calculate operating, financial and combined leverage ratios and the sales increase needed to double EBIT. Problem 3 asks to calculate capitalization, capital structure and financial structure ratios. Problem 4 asks to calculate EPS under different financing alternatives to raise capital. Problem 5 similarly asks to calculate EPS under different financing plans. Problem 6 asks to recommend the best financing alternative to raise capital based on EPS. Problem 7 asks to calculate EPS for different financing plans to raise investment capital.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views3 pages

    Capital Structure Problems Assignment

    Uploaded by

    Ramya Gowda
    The document contains 7 problems related to capital structure and financial analysis. Problem 1 asks to calculate percentage changes in sales and operating profits under different cost scenarios. Problem 2 asks to calculate operating, financial and combined leverage ratios and the sales increase needed to double EBIT. Problem 3 asks to calculate capitalization, capital structure and financial structure ratios. Problem 4 asks to calculate EPS under different financing alternatives to raise capital. Problem 5 similarly asks to calculate EPS under different financing plans. Problem 6 asks to recommend the best financing alternative to raise capital based on EPS. Problem 7 asks to calculate EPS for different financing plans to raise investment capital.

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    of 3

    CAPITAL STRUCTURE PROBLEMS

    ASSIGNMENT
    1. Following is the cost information of a firm:

    Fixed cost = Rs.50000

    Variable cost = 70% of sales

    Sales = Rs.200000 in previous year and Rs. 250000 in current year.

    Find out percentage change in sales and operating profits when:

    a. Fixed costs are not there (no leverage)

    b. Fixed cost is there (leverage situation).

    c. A simplified income statement of Z ltd. Is given below. Calculate and interpret its degree of
    operating leverage, degree of financial leverage and degree of combined leverage.

    Income statement of Z ltd. For the year ended 31st march 2015

    Particulars Amount

    Sales 1050000

    Variable cost 767000

    Fixed cost 75000

    EBIT 208000

    Interest 110000

    Taxes (30%) 29400

    Net income 68600

    2. A firm has sales of Rs.2000000, variable cost of Rs. 1400000 and fixed costs of Rs.400000 and
    debt of Rs.1000000 at 10% rate of interest. What are the operating, financial and combined
    leverages? If the firm wants to double its earnings before interest and tax (EBIT), how much of
    a rise in sales would be needed on a percentage basis?

    3. Given the following information, you are required to compute:

    i. Capitalization
    ii. Capital structure
    iii. Financial structure

    Liabilities Amount
    Equity share capital 1000000
    Preference share capital 500000
    Long-term loans and debentures 200000
    Retained earnings 600000
    Capital surplus 50000
    Current liabilities 150000
    Total 2500000

    4. ABC company has currently an all equity capital structure consisting of 15000 equity shares of
    Rs.100 each. The management is planning to raise another Rs.25 lakhs to finance a major
    programme of expansion and is considering three alternative methods of financing:

    i. To issue 25000 equity shares of Rs.100 each.


    ii. To issue 25000, 8% debentures of Rs.100 each.
    iii. To issue 25000, 8% preference shares of Rs.100 each.

    The company’s expected earnings before interest and taxes will be Rs.8 lakhs. Assuming a corporate
    tax rate of 50%, determine the EPS in each alternative and comment which alternative is best and
    why?

    5. A ltd, company has equity share capital of Rs.600000 divided into shares of Rs.100 each. It
    wishes to raise further Rs.400000 for expansion cum modernization plans. The company plans
    the following financing schemes:

    a) All common stock


    b) Rs. One lakh in common stock and Rs. 3 lakhs in debt @ 10% p.a.
    c) All debts at 10% p.a.
    d) Rs.one lakh in common stock and Rs. 3 lakh in preference capital with the rate of dividend at
    8%.

    The company’s expected earnings before interest and tax (EBIT) are Rs.250000. the corporate rate of
    tax is 50%. Determine the earnings per share (EPS) in each plan and comment on the implications of
    financial leverage.

    6. A company’s capital structure consists of the following:

    Particulars Amount
    Equity share of Rs.100 each 20 lakhs
    Retained earnings 10 lakhs
    9% preference shares 12 lakhs
    7% debentures 8 lakhs
    Total Rs. 50 lakhs

    The company earns 12% on its capital. The income tax rate is 50%. The company requires a sum of Rs.
    25 lakhs to finance its expansion Programme for which the following alternatives are available to it:

    (i) Issue of 20,000 equity shares at a premium of Rs. 25 per share.

    (ii) Issue of 10% preference shares.

    (iii) Issue of 8% debentures.

    Which of the three financing alternatives would you recommend and why?
    7. XYZ Ltd. is considering three financial plans for which the key information is as below:

    (a) Total investment to be raised Rs.4, 00,000.

    (b) Plan of financing proportion:

    Plans Equity Debt Preference


    shares
    A 100% - -
    B 50% 50% -
    C 50% - 50%
    (c) Cost of debt 8%

    Cost of preference shares 8%

    (d) Tax Rate 50%

    (e) Equity shares of the face value of Rs.10 each will be issued at a premium of Rs.10 per share.

    (f) Expected EBIT is Rs. 1, 60,000

    Determine for each plan: Earning per share (EPS)

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