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    CASE

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    Sanskar Vyas
    Divya Electronics is a 20-year old electronics firm promoted by Dipankar Mitra. The firm has performed fairly well and been profitable. It is considering financing a 200 crore expansion project through either a public issue of equity shares at 106 rupees per share or private placement of debentures carrying 8% interest. The board will meet to decide on the financing option, and an analysis of the two options' impact on EPS, degree of total leverage, and other factors has been requested.

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    CASE

    Uploaded by

    Sanskar Vyas
    52 views1 page
    Divya Electronics is a 20-year old electronics firm promoted by Dipankar Mitra. The firm has performed fairly well and been profitable. It is considering financing a 200 crore expansion project through either a public issue of equity shares at 106 rupees per share or private placement of debentures carrying 8% interest. The board will meet to decide on the financing option, and an analysis of the two options' impact on EPS, degree of total leverage, and other factors has been requested.

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    Divya Electronics is a 20-year old electronics firm promoted by Dipankar Mitra. The firm has performed fairly well and been profitable. It is considering financing a 200 crore expansion project through either a public issue of equity shares at 106 rupees per share or private placement of debentures carrying 8% interest. The board will meet to decide on the financing option, and an analysis of the two options' impact on EPS, degree of total leverage, and other factors has been requested.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    52 views1 page

    CASE

    Uploaded by

    Sanskar Vyas
    Divya Electronics is a 20-year old electronics firm promoted by Dipankar Mitra. The firm has performed fairly well and been profitable. It is considering financing a 200 crore expansion project through either a public issue of equity shares at 106 rupees per share or private placement of debentures carrying 8% interest. The board will meet to decide on the financing option, and an analysis of the two options' impact on EPS, degree of total leverage, and other factors has been requested.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 1

    Divya Electronics was promoted about twenty years by Dipankar Mitra, who continues to be the

    Executive Chairman of the firm. Initially, the firm employed a debt-equity ratio of 1.5:1 as the promoter
    had limited resources. While the firm had a few bad patches, it has performed fairly well and has been
    reasonably profitable. Over time, the proportion of debt in the capital structure diminished. The firm also
    issued bonus shares on two occasions once before making its IPO eight years ago and once subsequently.
    The financial statements of the firm for the just concluded financial year are given below. The profit and
    loss account has been cast in the contribution format to facilitate the calculation of leverages.
    Balance Sheet Profit and Loss Account
    Sources of Funds ₹ in ₹ in crore
    crore
    1. Shareholders’ Funds Revenues 800
    Paid – up equity capital (14 crore 140 Variable costs 480
    shares of ₹ 10 each) Contribution margin 320
    Reserves and surplus 250 Fixed operating costs 180
    Loan Funds 200 profit before interest and taxes 140
    600 Interest 20
    2. Application of Funds Profit before tax 120
    1. Net fixed Assets 400 Tax 36
    2. Net Current Assets 200 Profit after tax 84
    600
    The current market price per share is ₹115, giving a retrospective PE ratio of 16.43, the highest in its
    history.
    Dipankar Mitra and his family holds 4.5 crores shares of Divya Electronics. The rest is held more or less
    equally by institutional investors and retail investors.
    The firm has an expansion project on hand that will require an outlay of ₹200 core which will be
    supported by external financing. The expansion project is expected to generate an annual avenue of ₹
    240 crore. Its variable costs will be 60 percent of revenues and its fixed operating costs would be ₹50
    crore. The expansion can be completed quickly.
    EMAN Consultants, the merchant bankers of Divya Electronics, believe that Divya Electronics can make
    a public issue of equity shares at ₹106. The issue expenses, however, will be ₹6 per share. The other
    option is to privately place debentures carrying an interest rate of 8 percent.
    The board of directors of Divya Electronics would be meeting shortly to decide on the means of financing
    to be adopted for the proposed expansion plan.
    You have been requested to present an analysis of the two options. In particular, you have been asked to.
    a) Compute the EPS – PBIT indifference point for the two financing options.
    b) Calculate the EPS for the following year under the two financing options assuming that the expansion
    project would be fully operational.
    c) Show how the degree of total leverage will change under the two financing options.
    d) Highlight any other issues that you believe are important for taking the decision.

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