CAPITAL STRUCTURE (2)

(Selected problems)

Problem-1: At present a company has 50,000 ordinary shares of Tk 100 each. The Company requires an additional capital of Tk 12, 50,000. In order to acquired the additional capital the company has been considering the following three alternative: 
 (I) Issue 12,500 ordinary shares.
 (ii) Borrow Tk. 12, 50,000 at 10% interest.
 (iii) Issue 12,500 10% preference shares of Tk 100 each.
If the earnings before interest and tax of the company are Tk 7, 50,000 show the effect of these there alternatives on earning per share. Assume tax rate is 40%. 
Problem-2: Currently a company has a total capital of Tk 20 lakh. Consisting of 40 percent debt capital 10 percent interest and 60% shares capital of Tk 100 per share. Now the company is planning to expand capital by 50 percent. The company has four alternative plans.
 (I) 50 percent by 12% debt capital and 50 percent by common stock share capital.
 (ii) Fully by 11% preferred stock capital.
 (iii) Fully by common stock capital.
 (iv) Fully by 12% debt capital.
If the expected rate of return (EBIT) on total asset is 20% and tax rate is 25% find out the EPS under each alternative method of financing. Comment on. 
Problem-3: Following is the capital structure of company.
12% Debt capital Tk. 30 Lakh
Common Stock Capital (80,000 Shares) Tk. 128 Lakh
Total Capital Tk. 158 Lakh
To finance an expansion program, the company needs additional capital of Tk. 40 Lakh. There are three alternative methods of financing.
(i) Through 14% debt financing.
(ii) Through 12% preferred stock financing.
(iii) Selling common stock shares of Tk. 160 per share.
Assuming 40% corporate tax and expected EBIT of Tk. 15 Lakh.
Find out: 
(A) Earning per share under each alternative methods of financing.
(B) Indifference point of EBIT under method (I) and (iii).
  You are also required to show the in indifference point in graph.
Problem-4: The Meghna cement com. has the following capital structure:
Common Stock Capital (TK. 100 per share of 40,000 share) 40, 00,000
12% Debt Capital 10, 00,000
  50, 00,000
The Com. Is planning to increase the capacity that will require an additional capital of Tk. 20, 00,000 next year the expected EBIT is Tk. 6, 00,000. Corporate tax rate is 40%. To finance the additional capital there are the following alternatives.
(I) fully by common stock
(II) fully by 14% debentures
(III) fully by 10% preferred stock
(IV) 50% by 14% debenture and 50% of common stock
(a) Calculate EPS and comment which alternative should be preferable.
(b) Calculate indifference EBIT and EPS between alternative (I) and (II)
(c) Calculate indifference EBIT and EPS between alternative (III) and (IV)
 
Problem-5 : ABC Ltd has the following capital structure.
Equity (Tk. 100 per share) Tk. 10,00,000
12% Debt Tk. 5,00,000
Total Tk 15,00,000
The company wishes to raise Tk. 5,00,000 for expansion program. The following alternatives are available :
i. 100% equity.
ii. 50% equity and 50% debt @ 12%
iii. 100% debt @ 12%
The expected EBIT is Tk. 20,00,000 the tax rate is 40%. Calculation the EPS and which one would you perfer. Calculate the indifference point between (i) and (ii).
Problem-6 : MRS co. Ltd. Has present capital structure as follows.
Equity share capital (10,000 shares) Tk. 10,00,000
10% Debt capital Tk. 5,00,000
Total Tk. 15,00,000
The firm is thinking to raise additional capital at Tk. 5,00,000 for its expansion. It has two alternative financial methods.
(i) Issue of 12% debenture.
(ii) Issue of 13% preference share capital of Tk. 2,00,000 and equity capital of Tk. 3,00,000.
Determine the indifference point of EBIT and EPS between these two financing methods. Tax rate is 30%.
Problem-7 : Modern Ltd has 20,000 common stock of tk. 100 each aggregating Tk. 20,00,000. It requires additional capital of Tk. 5,00,000. In order to raise such capital it has three following Alternatives.
a. Issuing 5,000 common stock 100 each
b. 10% debt of Tk. 5,00,000
c. 10% preferred stock @ 100 Tk. 5,00,000
Assume corporate tax rate is 50%.