Capital Structure

Ques: 1
Suppose that the Present Capital Structure of The Hawaii Company Ltd. Is as follows.

Common stock capital (No of share 1,00,000) 1,00,00,000

12% Debt Capital 50,00,000
Total Capital 1,50,00,000

The company is planing to expand it’s capacity that will require additional capital of TK 60,00,000.

There are 4 alternative methods of financing.

1. Issuing 14% Debenture
2. Issuing 13% Preferred Stock
3. Issuing Common Stock at TK 100 per Share
4. 50% issuing 14% Debenture & 50% issuing Common Stock at TK 100 per Share

The expected earning before interest and taxes (EBIT) is TK 40,00,000 & Corporate Tax rate is 40%.

You are required to:

i. Calculate the Earning Per Share (EPS) under different methods of financing.

Ques: 2
Following is a capital structure of the XYZ Company

Common stock capital (No of share 80,000) 1,28,00,000

12% Debt Capital 30,00,000
Total Capital 1,58,00,000

To finance and expansion program the company needs additional capital of TK 40,00,000.
There are 3 alternative methods of financing.
1. Through 14% Debt financing
2. Through 12% Preferred Stock financing
3. Selling Common Stock share of TK 160 per share

Assuming 40% corporate tax rate & expected earning before tax (EBIT) TK 15,00,000.

Find out:
i. EPS under it’s alternative method of financing
ii. Indifference point of EBIT under method 1 & 3. Show the indifference point in graph.
 Ques: 3
Following is a capital structure of the XYZ Company

Common stock capital (No of share 80,000) 1,28,00,000

12% Debt Capital 30,00,000
10% Preferred Stock 20,00,000
Total Capital 1,78,00,000

To finance and expansion program the company needs additional capital of TK 40,00,000.
There are 4 alternative methods of financing.
1. Through 14% Debt financing
2. Through 12% Preferred Stock financing
3. Selling Common Stock share of TK 160 per share
4. 40% issuing 14% Debenture & 60% 12% Preferred Stock

Assuming 40% corporate tax rate & expected earning before tax (EBIT) TK 17,00,000.

Find out:
i. EPS under it’s alternative method of financing
ii. Indifference point of EBIT under method 1 & 3. Show the indifference point in graph.

Ques: 4
A Cement Manufacturing Company earn EBIT of TK 6,00,000 producing 10,000 bags of cement last
year.
The capital structure of the company was

Common stock capital (TK 100) 20,00,000

12% Debt Capital 10,00,000
Total Capital 30,00,000

The company is planing to expand it’s capacity that will require additional capital of TK 20,00,000 in
the next year.
Expected earning before tax (EBIT) TK 4,00,000 & corporate tax rate of the company is 25%.

To finance the additional capital there are 5 alternative methods of financing.

1. Fully by common stock capital
2. Issuing 14% Debenture
3. Issuing 12% Preferred Stock
4. 50% issuing 14% Debenture & 50% issuing Common Stock
5. 75% issuing 14% Debenture & 25% issuing Common Stock

Find out:
i. EPS under it’s alternative method of financing
ii. Indifference point of EBIT under method 1 & 2. Show the indifference point in graph.