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Financial management practical Questions

1. Sakshi Ltd. Is a company manufacturing electronic goods. It has a share capital of Rs. 120 lakhs. The earning
per share in the previous years was Rs 0.5. For diversification, the company requires additional capital of Rs 80
lakhs. The company raised funds by issuing 10% debentures for the same. During the current year, the company
earned a profit of Rs. 16 lakhs on capital employed. It paid a tax of 40 %.
(a) State whether the shareholders gained or lost in respect of earning per share on diversification. Show your
calculations clearly.
(b) Also, state any three factors that favor the issue of debentures by the company as part of its capital structure.
2. ‘Viyo Ltd.’ Is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. The earning per share
in the previous year was Rs.0.50. For diversification, the company requires additional capital of Rs. 40 lakhs.
The company raised funds by issuing 10% debentures for the same. During the current year the company earned
profit of 8 Lakhs on capital employed. It paid tax @ 40%.
(a) Slate whether the shareholders gained or lost, in respect of earning per share on diversification. Show your
calculations clearly.
(b) Also, state any three factors that favour the issue of debentures by the company as part of its capital
structure.
3. There are two companies B and D. Total contribution of capital is Rs.40 lakhs each. The proportion of equity
in the total capital of the company B is Rs. 10 lakhs and debt is Rs.30 lakhs. While in company D, the total
equity capital is Rs.40 lakhs, sourced through equity. EBIT is Rs.8 lakhs, the interest rate on debt is @ 10% and
the tax rate is 30%. Which company enjoys the favourbale financial leverage?
4. A company’s earnings before interest and tax is Rs. 7 lakh. It pays 10% interest on its debt. Total investment
of company is Rs. 50 lakh.
(a) Advise company whenever it should include debt or equity to raise its capital.
(b) Name the concept related to this.
© Will the company’s decision to raise funds from debt or equity will change if the company’s EBIT becomes 3
lakh.
5. Krish Limited is in the business of manufacturing and exporting carpets and other home décor products. It
has a share capital of 70 lacs at the face value of 100 each. Company is considering a major expansion of its
production facilities and wants to raise 50 lacs. The finance manager of the company Mr. Prabhakar has
recommended that the company can raise funds of the same amount by issuing 7% debentures. Given that
earning per share of the company after expansion is 35 and tax rate is 30%, did Mr. Prabhakar give a justified
recommendation? Show the working.
6. The present earnings of a company before interest and tax is 10 lakhs. The company wants to increase its
total capital investments by 50% through an additional issue of 10% debentures. At present the total capital of
the company is 50 lakhs, out of which 40 lakhs has been raised through equity and rest though 10% debentures.
The tax is levied @ 40%. The face value of an equity share is 10 and that of a debenture is 100.
(a) Assuming the Rate of return on investment to be same calculate the projected EPS of the company on
issuing additional debentures. Show your working Clearly.
(b) Do you think the company has taken the right decision by choosing debt to raise further capital? Name the
concept underlying this decision.
7. Farishte Ltd. Is a company manufacturing wellness products. It has a share capital of 180 lakhs. The face
value of a share is 10. The earning per share in the previous year was 0.60. For diversification, the company
requires additional capital of 120 lakhs. The company raised funds by issuing 10% debentures for the same.
During the current year the company earned profit of 24 lakh on capital APC employed. It paid tax@ 30%.
 PRATIKSHA NAHAR (CELL : 6376421770)
(a) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your
calculations clearly.
(b) Also, state any three factors that favour the issue of equity by the company as part of its capital structure.
8. Vedansh Limited has a share capital of 10,00,000 divided into shares of ₹100 each. For expansion purpose,
the company requires additional funds of 5,00,000. The considering the following alternatives for raising funds.
Alternative 1 Issue of 5,000 equity shares of ₹100 each
Th Alternative 2 Issue of 10% debentures of ₹ 5,00,000
The company’s present Earnings Before Interest and Tax (EBIT) is ₹4,00,000 p.a. Assuming that the rate of
Return of Investment remains the same after expansion, which alternatives should be used by company in order
to maximise the returns to the equity shareholders. The tax rate is 50%. Show the working.
9. ‘X Ltd. Issued 14% debentures of ₹4,00,000 and 10,000 equity shares of 60 each. This investment resulted in
a net profit of 2,00,000 before interest and tax. The tax rate was 50%.
(i) Calculate the ‘Return on Investment and Earning per Share of ‘X Ltd’.
(ii) State with reason whether the above example is that of favourable or unfavourable leverage.
10. Smart Stationery Ltd.’ Wants to raise funds of 40,00,000 for its new project. The management is
considering the following mix of debt and equity to raise this amount
Capital Structure
Alternative I (₹) II (₹) III (₹)
Equity 4000000 30,00,000 10,00,000
Debt 0 10,00,000 30,00,000
Other details are as follows
Interest Rate on Debt 9%
Face Value of Equity Shares 100 each
Tax Rate 30%
Earning Before Interest and Tax (EBIT) 8,00,000
(i) Under which of the three alternatives will the company be able to take advantage of Trading on
Equity?
(ii) Does Earning Per Share always rise with increase in debt?
11. The Return on Investment (RoI) of a company ranges between 10-12% for the past three years. To finance
its future fixed capital needs, it has the following options for borrowing debt.
Option ‘A’ : Rate of interest 9%
Option ‘B’ : Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reason in support of your answer. Also state the
concept being used in taking the decision.