Page 205 - DMGT207_MANAGEMENT_OF_FINANCES
P. 205

Management of Finances




                    Notes                   3,75,00,00,000 = 75,000x – 50,000x = 25,000x
                                                      x = 3,75,00,00,000/25,000
                                                      x =   150,000
                                                                 Calculation of  EPS

                                                                                      Financial Plan
                                                        Particulars
                                                                            Alternative 'A' ( )     Alternative 'B' ( )
                                    EBIT                                        1,50,000            1,50,000
                                    Less: Interest                                ---                  50,000
                                    EBT / or PBT                                1,50,000            1,00,000
                                    Less: Tax at  50%                           75,000              50,000
                                    EAT                                         75,000              50,000
                                    Less: Preference dividend                     ---                ---
                                    Earnings available to share holders.        75,000              50,000
                                    No. of shares (existing + new)          (1,00,000 + 50,000)   (1,00,000 + 0)
                                         Earnings available to shareholders   75,000              50,000
                                    EPS =                                            = 0.5              = 0.5
                                              No. of equity shares            1,50,000           1,00,000





                                      Task  "As the debt-equity ratio increases, there is a trade-off between  the interest tax
                                     shield and bankruptcy, causing an optimum capital structure." Do you agree with the
                                     statement? Give reasons.

                                     


                                     Caselet     Rajart and Associates — Financial Alternatives

                                           his case provides the opportunity to match financing alternatives with the needs of
                                           different companies. It allows  the reader to demonstrate a familiarity with different
                                     Ttypes of securities.
                                     George Thomas was finishing some weekend reports on a Friday afternoon in the downtown
                                     office of Wishart and Associates, an investment-banking firm. Meenda, a partner in the
                                     firm, had not been  in the  New York  office since Monday. He  was on a trip through
                                     Pennsylvania, visiting five potential clients, who were considering the flotation of securities
                                     with the assistance of Wishart and Associates. Meenda had called the office on Wednesday
                                     and told George’s secretary that he would cable his recommendations on Friday afternoon.
                                     George was waiting for the cable.
                                     George knew that Meenda would be recommending different types of securities for each
                                     of the five clients to meet their individual needs. He also knew Meenda wanted him to call
                                     each of the clients to  consider the recommendations  over  the  weekend. George was
                                     prepared to make these calls as soon as the cable arrived. At 4:00 p.m. a secretary handed
                                     George the following telegram.

                                     George Thomas, Wishart  and Associates STOP Taking advantage of offer to go skiing in
                                     Poconos STOP Recommendations  as follows: (1) common stock, (2  ) preferred stock,


                                                                                                        Contd...



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