solve this problem fast pls.....
Dear Student,
(a) Profit before interest & Tax - 10,00,000
Present Total Capital - 50,00,000
Number of Equity Shares = Equity Share Capital / Face value of equity Share
= 40,00,000 / 10 =40,000 Number of Equity Shares
Required Increase in Capital = 50% of Existing Capital
= 50 /100 × 50,00,000 = 25,00,000
Total New Capital = 50,00,000 + 25,00,000 = 75,00,000
As increase in capital is to be done through issue of new 10% Debentures so total value of Debentures ( old + new)
= 10,00,000 + 25,00,000 = 35,00,000
Number of Debentures = 35,00,000 / 100 = 3,50,000
Interest on Debentures = 35,00,000 × 10 / 100 = 3,50,000
Profit after Interest = Profit before Interest & Tax - Interest on Debentures
= 10,00,000 - 3,50,000 = 7,50,000
Tax @ 40% = 7,50,000 × 40/100 = 3,00,000
Profit after Tax = 7,50,000 - 3,00,000 = 4,00,000
EPS = Profit after Tax & Interest / Number of Shares
= 4,00,000 / 40,000 = 10
EPS of the company is 10
(b)Yes the company has chosen right decision to stick with the decision of issuing further capital by issue of debtentures as further issue of equity shares have caused a decline in the Earning per share of the company.
Regards
(a) Profit before interest & Tax - 10,00,000
Present Total Capital - 50,00,000
Number of Equity Shares = Equity Share Capital / Face value of equity Share
= 40,00,000 / 10 =40,000 Number of Equity Shares
Required Increase in Capital = 50% of Existing Capital
= 50 /100 × 50,00,000 = 25,00,000
Total New Capital = 50,00,000 + 25,00,000 = 75,00,000
As increase in capital is to be done through issue of new 10% Debentures so total value of Debentures ( old + new)
= 10,00,000 + 25,00,000 = 35,00,000
Number of Debentures = 35,00,000 / 100 = 3,50,000
Interest on Debentures = 35,00,000 × 10 / 100 = 3,50,000
Profit after Interest = Profit before Interest & Tax - Interest on Debentures
= 10,00,000 - 3,50,000 = 7,50,000
Tax @ 40% = 7,50,000 × 40/100 = 3,00,000
Profit after Tax = 7,50,000 - 3,00,000 = 4,00,000
EPS = Profit after Tax & Interest / Number of Shares
= 4,00,000 / 40,000 = 10
EPS of the company is 10
(b)Yes the company has chosen right decision to stick with the decision of issuing further capital by issue of debtentures as further issue of equity shares have caused a decline in the Earning per share of the company.
Regards