1. Exel Limited is considering three financing plans.

The key information is as follows:

a. Total funds to be raised, Rs 2,00,000.
b. Financing plans

Plans Equity (%) Debt (%)

Preference (%)
A 100 — —
B 50 50 —
C 50 — 50

c. Cost of debt 8 per cent; cost of preference shares 8 per cent

d. Tax rate, 35 per cent
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, Rs 80,000.

Determine for each plan:

(i) earnings per share (EPS) and financial break-even point.
(ii) indicate if any of the plans dominate and compute the EBIT range among the plans for
indifference.

2. Suppose a firm has a capital structure exclusively comprising of ordinary shares

amounting to Rs 10,00,000. The firm now wishes to raise additional Rs 10,00,000 for
expansion. The firm has four alternative financial plans:
a. It can raise the entire amount in the form of equity capital.
b. It can raise 50 per cent as equity capital and 50 per cent as 5% debentures.
c. It can raise the entire amount as 6% debentures.
d. It can raise 50 per cent as equity capital and 50 per cent as 5% preference capital.
Further assume that the existing EBIT are Rs 1,20,000, the tax rate is 35 per cent, outstanding
ordinary shares 10,000 and the market price per share is Rs 100 under all the four
alternatives. Which financing plan should the firm select?

3. The financial manager of a company has formulated various financial plans to finance Rs
30,00,000 required to implement various capital budgeting projects:
(i) Either equity capital of Rs 30,00,000 or Rs 15,00,000 10% debentures and Rs 15,00,000
equity;
(ii) Either equity capital of Rs 30,00,000 or 13% preference shares of Rs 10,00,000 and Rs
20,00,000 equity;
(iii) Either equity capital of Rs 30,00,000 or 13% preference capital of Rs 10,00,000, (subject
to dividend tax of 10 per cent), Rs 10,00,000 10% debentures and Rs 10,00,000 equity; and
(iv) Either equity share capital of Rs 20,00,000 and 10% debentures of Rs 10,00,000 or 13%
preference capital of Rs 10,00,000, 10% debentures of Rs 8,00,000 and Rs 12,00,000 equity.
You are required to determine the indifference point for each financial plan, assuming a 35
per cent corporate tax rate and the face value of equity shares as Rs 100.

1. The existing capital structure of XYZ Ltd. is as under:

Equity Shares of Rs. 100 each Rs. 40,00,000
Retained Earnings Rs. 10,00,000
 9% Preference Shares Rs. 25,00,000
7% Debentures Rs. 25,00,000

The current rate of return on the company’s capital is 12%, and the income-tax rate is
50%. The company requires a sum of Rs. 25,00,000 to finance an expansion
programme for which it is considering the following alternatives:
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 It is estimated that the PE ratios in the cases of equity,
preference and debenture financing would be 20,17 and 16, respectively. Which of the
above alternatives would you consider to be the best?

EBIT 15,00,000 15,00,000

15,00,000
Int. 1,75,000 1,75,000
3,75,000
EBT 13,25,000 13,25,000
11,25,000
Tax 6,62,500 6,62,500
5,62,500
EAT 6,62,500 6,62,500
5,62,500
Pref. Div. 2,25,000 4,75,000
2,25,000
NI to S/h 437500 1,87,500
3,37,500
No. of Share 40,000 + 20,000 = 60,000 40,000
40,000
EPS 7.2916 4.6875
8.4375
P/E 20 17 16
MPS 145.83 79.6875 135