Problem 5:A Company has a capital of Rs. 400000 divided into shares of Rs. 10 Each. It has majorexpansion programme requiring an investment of another Rs. 200000. The management isconsidering the following alternatives for raising this amount:a. Issue of 20000 shares of Rs. 10 eachb. Issue of 20000, 12% Preference shares of Rs. 10 eachc. Issue of 10% Debentures of Rs. 200000The company has a EBIT of Rs. 120000 pa. You are required to calculate the effect of each ofthe above modes of financing on the EPS presuming tax rate to be 50%, EBIT continues to bethe same even after expansion and EBIT increases by 40%

The objective of the question is to calculate the effect of different modes of financing on the…

Answered: Problem 5: A Company has a capital of…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter3: The Financial Environment: Markets, Institutions And Investment Banking

Section: Chapter Questions

Problem 15PROB

See similar textbooks

Similar questions

13. James Plc has 4 million, £1 ordinary shares in issue. The board of the company has decided it needs to raise approximately £2 million, net of issue costs, to finance a new project by means of a 1 for 4 rights issue. The issue price will be at 15% discount to the current market price of £2.59 and the issue costs are expected to be £100,000. Required: a) Calculate and explain the following: i. The theoretical ex rights price per share ii. The net cash raised iii. The value of the right per share b) Using the information provided, illustrate (show all your workings) and discuss the effect of the proposed rights issue on an investor who owns 10,000 ordinary shares of James Plc, given they: i. Take up the rights ii. Sell the rights iii. Do nothing, allowing the rights to lapse c) Identify and discuss other methods which could be used to raise new equity finance.
QUESTION 3 (a) Win Corp. is proposing a rights offering. Presently there are 650,000 sharesoutstanding at RM21 each. There will 40,000 new shares offered at RM15 each.Calculate the following:(i) New market value of the company.(ii) Numbers of rights that associated with one new shares.(iii) The ex-rights price.(iv) The value of a right.(v) Total flotation cost. Given the flotation cost is 7 percent.
A Ltd. Has the following Capital structure as on 31st March 20xx. · Equity Capital Rs.520 Crores. · Face Value of each share Rs.10 · General Reserve Rs.310 Crores · Securities Premium A/c Rs.120 Crores · Profit & Loss Account Rs.110 Crores · Infrastructure Development reserve Rs.180 Crores · Loan Funds Rs.2000 Crores The Board approved a Buyback of the maximum permissible number of equity shares considering the huge surplus funds available. Market price of each share is Rs.40. In order to ensure success of Buyback, the company decided to offer an amount which is 20% over market price. Infrastructure Development Reserve has been created for statutory IT purpose. A. Find out the maximum number of shares that can be…
13-8 Abacus Corporation needs to raise $20 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 $48 per share and the company’s underwriter charges an 8% spread, how many shares need to be sold? Select one: a. 452,899 b. 571,429 c. 617,143 d. 621,118 e. 675,128
A ltd has 60,000 preference shares of $10 each. The company wants to raise another $3000000. These are the different financial plans. a) all debenture carrying 10% interest. b) all equity c) $2000000 in equity shares and $1000000 in debenture carrying 10% interest. d) $1000000 in equity shares and $2000000 in 10% preference shares. tax rate is 50%. Calculate eps when EBIT is $1350000
Question 1 Jimmy Shoes Inc. has 10,000 shares outstanding with a stock price of $40 per share. The current weighted average cost of capital is 7%. It also carries long-term debt of $200,000 at an interest rate of 7% p.a. One of the agenda items in its AGM is to switch to a D/E of 1. Based on this information, answer the following questions: a) What will be the number of outstanding shares for Jimmy Shoes Inc. if it switches to a D/E ratio of 1? (Hint: Current Debt = $200,000, current equity = 10,000 shares x $40 = $400,000, current D/E = 2/4 = 0.5/1. If the firm seeks to increase its D/E to 1, it can think of borrowing more) b) What is the level of EBIT at which shareholders will be indifferent between the two capital structures, the one with a D/E = 0.5/1 and the other with a D/E of 1?
MOL Company has P200,000 available to pay dividends. It has 12,000 10% preference shares (of which, 300 shares are in the treasury), P100 par and 50,000 ordinary shares with a par of P40. The preference share is selling for P125 and the ordinary share is selling at P50 per share. Required: Determine the amount of dividends and dividends per share to be paid to each class of share for each of the following independent assumptions. - Preference share capital is non-participating and non-cumulative. - Preference share capital is non-participating and cumulative. Preference dividends are two years in arrears at the beginning of the year. - Preference share capital is fully participating and cumulative. Preference dividends are one year in arrears at the beginning of the year. - Preference share…
The Land Company wants to raise its working capital. After analysis of the available options, the Company decides to issue 6,000 shares of P30 par preference shares with detachable warrants. The package of the shares and warrants sells for P120. The warrants enable the holder to purchase 6,000 shares of P10 par ordinary shares at P40 per share. Immediately following the issuance of the shares, the share warrants are selling at P10 per share. The market value of the preference shares without warrant is P90.1. What amount should be assigned to the share warrants issued?2. Assuming that only 80% of the warrants are exercised, the entry to record the exercise of the warrants should include a?
Lotus Herbal company’s capital structure consists of 1.5 million equity shares and 500,000 preference shares. Preference shares carry a dividend of Rs. 12 per share. The EPS is Rs. 2.00. The company requires Rs. 10 million of external financing for which it is considering 2 alternatives:- (i) issuing 1 million equity shares for Rs. 10 each, (ii) Issuing Rs. 10 million worth of Debentures carrying 15% interest.Compute the EPS-EBIT indifference point: a. when tax rate is 50%; b. There are no taxes
Company A is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for $5 per share. The bonds can be issued with a 12% coupon rates. The firm’s existing preference share pay dividends of $2 per share. The company’s corporate income tax is 30%. The financial statement is as follow:- Current Assets $ 2,000,000 Fixed Assets $ 8,000,000 $ 10,000,000 Current Liabilities $ 1,500,000 Bonds: (8.5%, $1,000 par value) $ 4,000,000 (9%, $1,000 par Value) $ 1,000,000 Preference Shares ($ 100 par value)…
Laos Company wants to raise its working capital. After analysis of the available options, the Company decides to issue 6,000 shares of P30 par preference shares with detachable warrants. The package of the shares and warrants sells for P120. The warrants enable the holder to purchase 6,000 shares of P10 par ordinary shares at P40 per share. Immediately following the issuance of the shares, the share warrants are selling at P10 per share. The market value of the preference shares without warrant is P90.What amount should be assigned to the share warrants issued?
The return on assets for Super Express Ltd is 12.3% pa. Currently the capital structure for Super Express Ltd is 100% equity but management are considering issuing debt. Super Express Ltd has 34,400 shares on offer at a current price of $5.78 per share. Management wishes to issue enough debt capital to repurchase 35% of existing shares at the current share price. a)Calculate the amount of debt that the management of Super Express will be issuing. Give your answer in dollars to the nearest dollar. Debt issued = $ b)Calculate the debt to equity (leverage) ratio of Super Express Ltd after the debt issue. Give your answer rounded to 2 decimal places. Debt to equity ratio =

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CFIN

Finance

ISBN:

9781337671743

Author:

BESLEY

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

EBK CFIN

Finance

ISBN:

9781337671743

Author:

BESLEY

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

SEE MORE TEXTBOOKS