Question

b) XYZ Company has currently and equity share capital of s 40 lakhs consisting of 40,000 equity shares of Tk. 100 each. The management is planning to raise another Tk. 30 lakhs to finance a major programme of expansion through one of the four possible financing plans.

• Entirely through equity shares

• Tk. 15 lakhs in equity shares of Tk. 100 each and the balance in 8% debentures.

• Tk. 10 lakhs in equity shares of Tk. 100 each and the balance through long-term borrowings at 9% interest p.a.

• Tk. 15 lakhs in equity shares of Tk. 100 each and the balance through preference shares with 5% dividend. The company’s EBIT will be Tk. 15 lakhs. Assuming corporate tax of 50%. Determine the EPS and which financing plan should the firm select?

Answer 1

Since the EPS as well as degree of financial leverage (DFL) is highest in financial plan III, it should be accepted. The company should raise 10 lakhs in equity shares and the balance of 20 lakhs through long-term borrowing at 9% interest p.a.

Refer to image below for calculations;