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2.1 FM Test Capital Structure

The document outlines a chapter-wise test on capital structure with various financial problems related to Nandu Ltd, including expansion financing options and earnings per share calculations. It includes instructions for the test duration, submission of answers, and specific financial scenarios for companies requiring analysis of their capital structures. Additionally, it covers concepts such as EBIT-EPS indifference points, market value calculations, and the impact of debt on company valuation.

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siddhantbhardwaj1899
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8 views3 pages

2.1 FM Test Capital Structure

The document outlines a chapter-wise test on capital structure with various financial problems related to Nandu Ltd, including expansion financing options and earnings per share calculations. It includes instructions for the test duration, submission of answers, and specific financial scenarios for companies requiring analysis of their capital structures. Additionally, it covers concepts such as EBIT-EPS indifference points, market value calculations, and the impact of debt on company valuation.

Uploaded by

siddhantbhardwaj1899
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CA Aman Agarwal https://t.

me/costingwithcaaman

Chapter wise Test (2003)


Capital Structure

Instructions
- All questions are compulsory.
- Test Duration will be 1 Hour, starting from 11:00 AM to 12:00 Noon
- 5 minutes reading time will be provided before 11, i.e. question paper will be
shared by 10:55 AM.
- Share your scanned answer sheets by 12:10 on below link
https://forms.gle/wLRZWiTvMELNpCeC6

1. [7 Marks] The following particulars relating to Nandu Ltd for the year ended 31
March 2023 is given

Output - 1,00,000 units at normal capacity


Selling price per unit Rs. 40
Variable cost per unit Rs. 20
Fixed Cost Rs. 10,00,000

The capital structure of the company as on 31 march 2023 is as follows


Particulars Amount
Equity Share Capital (100,000 shares at Rs. 10 each) 10,00,000
Reserves and Surplus 5,00,000
7% Debentures 10,00,000
Current Liabilities 5,00,000
Total 30,00,000

Nandu Ltd has decided to undertake an expansion project to use the market
potential, that will involve 10 lakhs.
The company expects an increase in output by 50% Fixed cost will be increased
by ₹ 5,00,000 and variable cost per unit will be decreased by 10%. The additional
output can be sold at the existing selling price without any adverse impact on
the market.
The following alternative schemes for financing the proposed expansion
programme are planned:
1. Entirely by equity shares of 10 each at par
2. 5 lakh by issue of equity shares of 10 each and the balance by
issue of 6% debentures of 100 each at par
3. Entirely by 6% debentures of 100 each at par
Find out which of the above-mentioned alternatives would you recommend for
Nandu Ltd. with reference to the risk and return involved, assuming a corporate
tax of 40%

2. [6 Marks] A company needs Rs. 42,50,000 for the construction of a new plant. The
following three plans are feasible:
CA Aman Agarwal https://t.me/costingwithcaaman

I The company may issue 4,25,000 equity shares at Rs. 10 per share.
II The company may issue 2,12,500 equity shares at Rs. 10 per share and
21,250 debentures of Rs. 100 denominations bearing an 8% rate of
interest.
III The company may issue 2,12,500 equity shares at Rs. 10 per share and
21,250 cumulative preference shares at Rs. 100 per share bearing an
8% rate of dividend.
(i) The company's earnings before interest and taxes are Rs. 75,000, Rs.
1,50,000, Rs. 3,00,000, Rs. 4,50,000 and Rs. 7,50,000. DETERMINE earnings
per share under each of three financial plans? Assume a corporate income tax
rate of 40%.
(ii) IDENTIFY which alternative would you recommend and why?
(iii) DETERMINE the EBIT-EPS indifference points by formulae between
Financing Plan I and Plan II and Plan I and Plan III.

3. [5 Marks] Kee Ltd. and Lee Ltd. are identical in every respect except for
capital structure. Kee Ltd. does not employ debt in its capital structure,
whereas Lee Ltd. employs 12% debentures amounting to Rs. 20 lakhs.
Assuming that:
(i) All assumptions of MM model are met;
(ii) The income tax rate is 30%;
(iii) EBIT is Rs. 5,00,000 and
(iv) The equity capitalization rate of Kee Ltd. is 25%.
CALCULATE the average value of both the Companies.

4. [5 Marks] Rounak Ltd. is an all equity financed company with a market value
of Rs. 25,00,000 and cost of equity (Ke) 21%. The company wants to buyback
equity shares worth Rs. 5,00,000 by issuing and raising 15% perpetual debt
of the same amount. Rate of tax may be taken as 30%. After the capital
restructuring and applying MM Model (with taxes), you are required to
COMPUTE:
(i) Market value of J Ltd.
(ii) Cost of Equity (Ke)
(iii) Weighted average cost of capital (using market weights) and comment
on it.

5. [7 Marks] The following data relates to two companies belonging to the same
risk class:

Particulars A Ltd. B Ltd.


Expected Net Operating Income Rs. 18,00,000 Rs. 18,00,000

12% Debt Rs. 54,00,000 -

Equity Capitalization Rate - 18


CA Aman Agarwal https://t.me/costingwithcaaman

REQUIRED:
(a) Determine the total market value, Equity capitalization rate and weighted
average cost of capital for each company assuming no taxes as per M.M. Approach.
(b) Determine the total market value, Equity capitalization rate and weighted
average cost of capital for each company assuming 40% taxes as per M.M. Approach.

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