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प्रश्न
Viyo Ltd.' is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. The earnings per share in the previous year was Rs 0.50. For diversification, the company requires additional capital of Rs 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit of 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 you calculations clearly.
b. Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.
Kay Ltd. is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. In the previous year its earnings per share was Rs 0.50. For diversification, the company requires additional capital of Rs 40 lakhs. The company raised funds by issuing 10% Debentures for the same. During the year the company earned profit of 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 you calculations clearly.
b. Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.
उत्तर
(a) Let the face value of equity share be Rs 10 each.
Profit before Interest & Tax Rs 8,00,000
Interest on 10% debentures Rs 4,00,000
Profit before Tax Profit before Interest and Tax - Interest
Profit before Tax 8,00,000 - 4,00,000 Rs 4,00,000
Tax @ 40% `=4,00,000xx40/100= Rs 1,60,000`
Profit available to shareholders 4,00,000-1,60,000=Rs 2,40,000
Earning Per Share(EPS) =`"Profit after Tax"/"Number of Equity Share"=240000/600000=0.4`
Thus, shareholders have lost after the issue of debentures as earning per share (EPS) has fallen from Rs 0.5 to Rs 0.4.
(b) Three factors which favour the issue of debentures by the company as part of its capital structure:
1. Good cash flow position: If the company has a good cash flow position, then issuing debentures is more favourable as compared issuing shares.
2. High tax rate: It is beneficial for the company to issue debentures if the tax rate is higher. This is because the interest paid by the company to its debenture holders is tax deductible.
3. Control: If the company does not want to dilute the control of management, then issuing debentures is the best for the company.
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संबंधित प्रश्न
Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital ofRs 120 lakhs. The earning per share in the previous year wasRs 0.5. For diversification, the company requires additional capital ofRs 80 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit ofRs 16 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.
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Read the following text and answer the following questions on the basis of the same:
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
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ICR = ______
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