Page 205 - DMGT207_MANAGEMENT_OF_FINANCES

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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