Financial Management WorkSheet-Numerials Date- 15.10.

18

Q1 Viyo Ltd is some company manufacturing textiles. It has share capital of Rs 60

Lakhs. The earning per share in the previous year was Rs.0.50. For
diversification, the company requires additional capital of Rs 40lakhs.The
company raised funds by issuing 10% debentures for the same. During the
current year company earned profit Rs 8 lakhs on capital employed. It paid
tax@ 40%.
a) State whether the shareholders gained or lost, in respect of earning per
share on diversification. Show your calculations clearly.
b) Also, state any three factors that favour the issue of debentures by the
company as part of its capital structure. (assuming face value of a share
Rs 10 per share and in II case Rs 100 per share)
Q2 A company’s earnings before interest and tax is Rs 7Lakh. It pays 10% interest
on debt. Total investment of company is Rs 50 Lakhs.
a) Advise company whenever it should include debt or equity to raise its
capital.
b) Name the concept related to this.
c) Will the company’s decision to raise funds from debt or equity will
change if company’s EBIT Rs 3 Lakhs?
Q3. ‘Muscle Gain Ltd.’ is a company engaged in production of health and fitness
food supplements. Currently it is selling its products through indirect channels
of distribution. But now due to growing popularity of online marketing the
company now wants to launch its own website for direct online sale of its
products.
The finance manager of the company is proposing to introduce debt in the
capital structure of the company so that they can enjoy the benefit of trading on
equity. In order to fund its expansion plans he is planning to raise 40 Lakhs
through a loan @10% from a bank. The present capital structure of the
company comprises of 9 Lakh equity shares @ ₹10 each. The rate of tax paid by
the company is 30%.
On the basis of the given information about ‘Muscle Gain Ltd.’ answer the
following questions:
(a) What are the two conditions necessary for taking advantage of trading
on equity.
(b) If the expected rate of return on investment remains the same as it was
for this year i.e., 15%, do you think that the financial manager will be
able to meet his goal? Show your working clearly.
Q4 Beta Ltd. is a plastic manufacturing company. Debt equity ratio of the company
is ideal one is 2:1 where 15% debentures of Rs 20,00,000 and equity is Rs
10,00,000(Rs10 per share) Company requires Rs 20,00,000 additional capital.
Financial manager advised to raise it from Rs 15,00,000 15% debentures, and
Rs 500,000 through 10% preference shares. Whereas CEO advised to raise Rs
20,00,000 by issuing equity shares. Return on investment is 20% and Tax rate is
30%.
In your opinion whose advise is in favour of shareholders.
 Identify and explain the concept highlighted in above case (show relevant
calculations
Financial Management WorkSheet-Numerials` Solution

Q1 Calculations showing earning per share on diversification:

Equity Share Capital Rs 60,00,000
10% Debentures Rs 40,00,000
Total Capital 1,00,00,000
EBIT 800,000
Less-10% interest on debentures 400,000
Profit before tax 400,000
Less tax 40% 1,60,000
Profit after interest and Tax 2,40,000
EPS=EAT/No of equity shares 0.40 assuming face value of a share is
RoI < Interest on debt i.e 8% Rs 10 per share
Rs 4 assuming face value of a share is
Rs100 per share
Q2 EBIT 700,000
Less interest on debentures 10% 100 000
Profit before tax 600,000
Less Tax assuming 40% 240,000
Profit after interest and tax 360,000
EPS EAT/No of equity shares 0.9
ROI=EBIT/Total funds*100
360.0000/400000 700,000/50,00,00* 100=14%
ROI > RATE OF INTEREST
14%>10%
Company can include debt in capital
B- Concept -Trading On Equity
C Yes it will change Company cannot include debt
component
300,000/ 50,00,000*100
ROI= 6%
ROI < interest on debt
Q3. (a) Two conditions for trading on equity are:
1. Interest on debentures should be tax deductible
2. ROI should be greater than interest on debt
(b) Yes Financial manager will be able to meet the goal as ROI > Cost
Calculations :

EBIT 19,50,0001
Less Interest on debentures 10 % 400,000
on 40,00,000
Profit before tax 15,50,000
Less Tax 30% 465000
Profit after interest and tax 10,85,000
 EPS= EAT/no of equity shares 1.20
1085000/900000
ROI > Cost condition is
favourable
15%>10%
Q4 Capital Structure :
Financial Manager CEO
Equity 10,00,000 10,00000+ 20,00,000=30,00,000
15% debentures 20,00 000 20,00,000
Additional debt 15,00,000
10% Preference Share 500,000 Nil
Total Funds 50,00,000 50,00,000
EBIT 10,00,000 10,00,000
Less interest on debt 15%
On 35,00,000 525000 300,000 ( 15% on 20,00,000)
Profit before tax 4,75,000 700,000
Less Tax 30% 1,42,500 2,10,000
Profit after tax 3,32,500 4,90,000
Less 10 % preference dividend
10% on 500,000 50,000 Nil
Profit after tax and dividend 2,82,500 4,90,000
EPS =EAT and Preference 4,90,000/300,000=
Dividend/No of equity shares

2.82,500/100000=2.82 1.63
Financial Manager’s advice is
favorable for shareholders
Concept is Trading on Equity -
Shareholders are gaining even
including debt component in our
capital structure.