Corporate finance(Capital structure Planning)

Problem # 10

A plastic Manufacturing Company is Planningto expand its assets by 50 percent All financing for expansion will come from external sources the expansion will generate additional sales ofrupees 300000with a return of 25 percenton sales before interest and taxes. The finance department of the company has submitted the following parts of the consideration of the boards

Plan 1 : issueof 10% debentures

Plan 2: issue of 10% debentures for half the required amount and balance in equity shares to issued at 25 percent premium

Plan 3: issue equity shares at 25 percent premium

Balance sheet of the co as on march 31

LiabilityAmount AssetsAmount

Equity Capital ( RS 10 Per share)400000Total assets1200000

8% Debentures300000

Retained Earning 200000

Current Liability 3000001200000

1200000

Income statement for the year ending march 31

SalesRS 1900000

Operating cost1600000

Ebit300000

Interest24000

Earning after interest276000

Taxes 96000

Earnings after taxes179400

Earning par share4.48

1-Determine the number of equity shares that will be issues if financial plan 3 is adopted

2-Determine the differences period between (I) plan 1 and 2 (ii) plan 1 and 3 (iii) plans 2 and 3

3-Assume thatthe price earnings ratio is expected to remain unchanged at 8 if plan 3 its adopted but is likely to drop to 6 if either plan1 or 2 is used to finance the expansiondetermine the expectedmarket price of shares in each of the situations

Problem 13

Excel ltd is considering three financing plans the relevant information is under

1-Total funds to be raised RS 200000

2-FINANCIAL PLANTS

PlansEquityDebtsPreferred stock

A100%--

B5050-

C50-50

Cost of debt 8% cost of preferred stock 8%

Tax rate 35%

Equity share has a face value of RS 10 Each will be issues at a premium of rs 10per shares

Expected EBIT RS 80000

Required

Calculate EPS of the above alternative plans and suggest the best one

Indicate the indifference points of the above alternatives