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cf assignment

The document outlines various companies' existing capital structures and their plans to raise additional capital for expansion or projects through different financing alternatives, including equity shares, debentures, and preference shares. Each company's situation includes specific EBIT, tax rates, and the amount to be raised, prompting an analysis to determine the best financing option from the shareholders' perspective. The document provides a structured approach for evaluating the impact of each financing method on shareholder value.

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cf assignment

The document outlines various companies' existing capital structures and their plans to raise additional capital for expansion or projects through different financing alternatives, including equity shares, debentures, and preference shares. Each company's situation includes specific EBIT, tax rates, and the amount to be raised, prompting an analysis to determine the best financing option from the shareholders' perspective. The document provides a structured approach for evaluating the impact of each financing method on shareholder value.

Uploaded by

swatipandey3898
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment 1

1. AB LTD. Existing capital structure is:

Rs.10,00,000 equity shares value of each share is Rs.100.

Company wishes to raise additional capital of Rs.10,00,000 for expansion.

The following alternatives available:

1)It can raise entire amount in the form of equity shares.

2) It can raise 50% as equity and 50% as a Debenture with interest of 5%

3) It can raise the entire amount as 6%Debentures.

4) 50% as equity & and 50% as 5% preference capital.

Tax is 35%. The EBIT is 1,20,000.

Suggest the best method of financing from the shareholder’s point of view.

2. ABC Ltd. has an existing capital structure with Rs.15,00,000 equity shares, each valued at Rs.75. The
company plans to raise Rs.20,00,000 for a new project. It is considering the following alternatives:

Raise the entire amount as equity shares.

Raise 40% as equity and 60% as 8% Debentures.

Raise the entire amount as 7% Preference Shares.

Raise 50% as equity and 50% as 6% Debentures.

The tax rate is 30%, and the EBIT is Rs.1,50,000. Determine the best method of financing from the
shareholders' perspective

3. XYZ Ltd. has an existing capital structure of Rs.8,00,000 equity shares with a face value of Rs.50
each. The company plans to raise Rs.12,00,000 for a modernization project. The alternatives are:

Raise the entire amount as equity shares.

Raise 30% as equity and 70% as 9% Debentures.

Raise the entire amount as 8% Preference Shares.

Raise 40% as equity and 60% as 7% Debentures.

Given a tax rate of 25% and an EBIT of Rs.1,00,000, which financing option is most favorable for
shareholders?
Assignment 1

4. LMN Ltd. has an existing capital structure with Rs.20,00,000 equity shares, each valued at Rs.80. The
company plans to raise Rs.30,00,000 for an expansion project. The available alternatives are:

Raise the entire amount as equity shares.

Raise 50% as equity and 50% as 7% Debentures.

Raise the entire amount as 8% Preference Shares.

Raise 40% as equity and 60% as 6% Debentures.

With a tax rate of 28% and an EBIT of Rs.2,00,000, analyze and recommend the best financing option for
the shareholders.

5. PQR Ltd. has an existing capital structure of Rs.12,00,000 equity shares, each valued at Rs.60. The
company plans to raise Rs.15,00,000 for a diversification project. The available alternatives are:

Raise the entire amount as equity shares.

Raise 40% as equity and 60% as 8% Debentures.

Raise the entire amount as 9% Preference Shares.

Raise 50% as equity and 50% as 7% Debentures.

Considering a tax rate of 32% and an EBIT of Rs.1,25,000, determine the most favorable financing option
for the shareholders.

6. A company has an existing capital structure as follows:

Equity shares of Rs.100 each ,Rs.of Rs.40,00,000

Retained Earnings Rs.10,00,000

9% Preference Shares Rs.25,00,000

7% Debentures Rs.25,00,000

Company earns 12% return and Income tax is 50%

Company wants to raise Rs.25,00,000 for its expansion.

Available alternatives are:

1)Issue 20000 Equity Shares at a premium of Rs.25 per share

2) Issue of 10% preference shares

3)Issue of 9% Debentures
Assignment 1

Projected P/E in the cases of equity, preference and debenture financing 20,17 & 16 respectively.

Which alternative would you consider to be the best.

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