XYZ Ltd wishes to raise Rs 1,000,000 to finance the acquisition of new assets.
XYZÂ Ltd wishes to raise Rs 1,000,000 to finance the acquisition of new assets. It is considering three alternative ways of financing assets: (i) to issue only equity shares at Rs 20 per share, (ii) to borrow Rs 500,000 at 14 per cent rate of interest and issue equity shares at Rs 20 per share for the balance or (iii) to borrow Rs 750,000 at 14 per cent rate of interest and issue equity shares at Rs 20 per share for the balance. The following are the estimates of the earnings from the assets with their probability distribution:
              EBIT (Rs)                                       Probabilities
                   80,000                                                0.10     Â
                   120,000                                                0.20     Â
                   160,000                                                0.40     Â
                   200,000                                                0.20     Â
                   320,000                                                0.10     Â
           You are required to (i) calculate the earnings per share (ii) compute the indifference points, and (iii) determine the financial risk, for each of the three alternatives. Assume a tax rate of 35 per cent.
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Answers
Status NEW
Posted 29 Jul 2017 01:07 PM
My Price 5.00
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file 1501334562-Answer.docx preview (125 words )
A-----------nsw-----------er ----------- A)----------- EB-----------IT=----------- (8-----------0,0-----------00*-----------(.1-----------)+1-----------200-----------00*-----------(.2-----------)+1-----------600-----------00*-----------(.4-----------)+2-----------000-----------00*-----------(.2-----------)+3-----------200-----------00*-----------(.1-----------)) -----------= (-----------800-----------0+2-----------400-----------0+6-----------400-----------0+4-----------000-----------0+3-----------200-----------0) -----------=16-----------8,0-----------00 -----------Now----------- un-----------der----------- fi-----------rst----------- si-----------tua-----------tio-----------n w-----------e w-----------ill----------- ha-----------ve -----------net----------- in-----------com-----------e o-----------f 1-----------,68-----------,00-----------0*(-----------1-.-----------35)-----------= 1-----------09,-----------200----------- No-----------. o-----------f s-----------har-----------e o-----------uts-----------tan-----------din-----------g w-----------ill----------- be----------- (1-----------000-----------,00-----------0/2-----------0)=----------- 50-----------,00-----------0 S-----------o, -----------EPS----------- wi-----------ll -----------be -----------(10-----------920-----------0/5-----------000-----------0)=----------- 2.-----------184----------- ru-----------pee-----------s ----------- 2)-----------Sam-----------e w-----------e w-----------ill----------- fo-----------llo-----------w u-----------nde-----------r s-----------eco-----------nd -----------con-----------dit-----------ion----------- wh-----------ere----------- 50-----------% w-----------ill----------- be----------- ra-----------ise-----------d b-----------y d-----------ebt----------- on----------- 14-----------%. -----------Her-----------e n-----------et -----------inc-----------ome----------- wi-----------ll -----------be -----------(16-----------800-----------0-7-----------000-----------0)(-----------1-.-----------35)-----------=
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