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(c) (d) Explain briefly how trade-off theory differs from pecking order theory. (3 Marks) Kclanivalley Manufacturing Company has a total capital of Rs. I million
(c) (d) Explain briefly how trade-off theory differs from pecking order theory. (3 Marks) Kclanivalley Manufacturing Company has a total capital of Rs. I million and it carns profit of Rs.100,000 before interest and tax. The newly appointed financial manager wants to take a decision on its capital structure. He has taken the following capital structure information after studying the Sri Lankan capital market. Amount of Debt Rs. Debt Cost of CapitalEquity Cost of Capital at given level of 10% 10.5% 11% 496 4.5% 5% 5% 5.5% 6% 8% 200000 300000 400000 12.4% 13.5% 16% 20% 600000 1) What amount of debt the company should maintain according to the optimal capital structure decisions? Estimate the equity cost of capital according to Modigliani and Miller theory 2) (6 Marks) (e) The following financial information is extracied from ABC Company listed in the Colombo Stock Exchange. Rs. 1000,000 (300,000) 400.000) 300,000 Sales Variable operating cost Fixed operating cost EBIT Interest EBT Tax @40% EAT Preferred dividends Earnings available for common stockholders 200,000 120,000 Number of shares outstanding 50,000 Calculate the degree of finance leverage. 2) l) If EBIT decrease by 20%, what is your forecast of EPS
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