1.

A Company’s capital structure consists of the following:

The company earns 10% on its capital. The income-tax rate is 50%. The company requires a
sum of Rs.25 lakhs to finance its expansion programme for which the following alternatives
are available to it:
a)Issue of 10,000 equity shares at a premium of Rs.15 per share.
b)Issue of 10% preference shares. c) Issue of 8% debentures.

Which of the three financing alternatives would you recommend and why?

2. XYZ Ltd. company has the choice for raising an additional sum of Rs.20,00,000 either by
raising a 10% Debt or by raising of additional equity shares of Rs.100 each at par. The
present Capital structure of the company consists of 2,00,000 equity shares of Rs.100 each
and no Debt. At what level of earnings before interest and tax (EBIT) after the new funds are
raised, would earnings per share (EPS) be the same whether new funds are raised either
through debt or issue of equity shares? Calculate EPS for both the alternatives to prove the
same.

3. XYZ Ltd. is considering three financial plans for which information is as below: a) Total
Investment to be raised Rs 4,00,000
b) Plans of Financing proportion:
Plans Equity Debt Pref Shares
A 100% - -
B 50% 50% -
C 50% - 50%

c) Cost of debt is 10%

d) Tax rate - 50%
e) Equity shares of Rs.10 each will be issued at a premium of Rs. 10 per share
f) Expected EBIT is Rs. 1,60,000

Determine for each plan and which alternative is best for the company and why?
i) Earnings per share (EPS)
ii) Financial break-even point

4. The following data are available for X Ltd. Selling Price per unit=Rs. 120
Variable Cost per unit= Rs.70
Fixed Cost= Rs.2,00,000
a)What is the operating leverage when X Ltd. produces and sells 6,000 units?
b)What is the percentage change that will occur in the EBIT of X Ltd. if output increases by
5%?

5. A firm has sales of Rs.30,00,000, variable cost of Rs.18,00,000 fixed costs of Rs.5,00,000
and debenture of Rs.12,00,000 in its capital structure obtained at 10%. What are its
operating, financial and combined leverage?