Page 142 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes The company’s share is currently selling at 150, but it expected to decline to 125 in case the
funds are borrowed in excess of 20 lacs. The funds can be borrowed at the rate of 10% up to 50
lacs at 15% over 5 lacs and up to 20 lacs and at 20% over 20 lacs. The tax rate applicable to the
company is 50%. Which option of financing the company should choose?
Solution:

The earnings per share is higher in Alternative 2 i.e., if the company finances the project by
raising debt of 70,00,000 and issue equity shares of 30,00,000.

Task The existing capital structure of XYZ Ltd. is as under:

The existing rate of return on the company’s capital is 12% and I/T rate 50%. The company
requires a sum of 25,00,000 to finance its expansion programme for which it is considering
the following alternatives:
(a) Issue of 20,000 equity shares at a premium of 25 per share.
(b) Issue of 10% preference shares.
(c) Issue of 8% debentures.

It is estimated that the P/E ratio in case of equity, preference and debentures financing
would be 20, 17 and 16 respectively.
Which of these alternatives would you advocate? Why?

EPS Volatility

EPS Volatility refers to the magnitude or the extent of fluctuations of earnings per share of a
company in various years as compared to the mean or average earnings per share. In other
words, EPS volatility shows whether a company enjoys a stable income or not.

Did u know? Higher the EPS volatility, greater would be the risk attached to the company.
A major cause of EPS volatility would be the fluctuations in the sales volume and the operating
leverage. It is obvious that the net profits of a company would greatly fluctuate with small

136 LOVELY PROFESSIONAL UNIVERSITY