manac solutions - Chapter 14: Financial and Operating...

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Chapter 14: Financial and Operating Leverage Problem 1 Assets (Rs) 1,000,000 No. of shares 100,000 10 Equity (Rs) 1,000,000 Debt (Rs) 0 PBIT (Rs) 250,000 Tax rate 35% 162,500 ROI 0.16 Expansion: Plan I Plan II Plan III 500,000 500,000 500,000 No. of shares 50,000 Price (Rs) 10 500,000 Debt (Rs) 500,000 70,000 500,000 70,000 Analysis of alternative financing plan: (Rs) Plan I Plan II Plan III Expected: PBIT 375,000 375,000 375,000 PBIT(1-T) 375,000 375,000 375,000 BV per share (Rs) PBIT (1 - T) (Rs) Investment (Rs) New equity (Rs) Interest at 14% Pref. capital (Rs) Dividend at 14%
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Assets 1,500,000 1,500,000 1,500,000 ROI: [PBIT(1- 0.25 0.25 0.25 16.25% 16.25% 16.25% PBIT 375,000 375,000 375,000 0 70,000 0 PBT 375,000 305,000 375,000 0 0 0 PAT (before p 375,000 305,000 375,000 0 0 70,000 243,750 198,250 173,750 No. of equity s 150,000 100,000 100,000 1,500,000 1,000,000 1,000,000 EPS:[ PAT (af 1.625 1.983 1.738 ROE: [PAT (a 0.1625 0.1983 0.1738 16.30% 19.80% 17.40% Problem 2 Funds needed 200,000 Tax rate 35% Plan I Equity No. of shares 20,000 Price (Rs) 10 200,000 (Rs) PBIT 5,000 12,000 25,000 0 0 0 PBT 5,000 12,000 25,000 0 0 0 PAT 5,000 12,000 25,000 30674.85 73619.63 153374.23 EPS (T = 0) 30674.85 73619.63 153374.23 Plan II Equity Debenture Less : Interest a Less : Tax @ 35% Less : Pref. dividend PAT available to equity shareholders Equity capital (E) things remaining the same, it is better than other two plans. Equity capital (Rs) Less : Interest Less : Tax EPS (T = 0.35)
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No. 10,000 1,000 Price 10 100 Total (Rs) 100,000 100,000 Interest rate 14% Interest 14000 (Rs) PBIT 5,000 12,000 25,000 Interest 5,000 5,000 5,000 PBT 0 7,000 20,000 Tax 0 0 7,000 PAT
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manac solutions - Chapter 14: Financial and Operating...

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