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Importance of weighted average cost of capital is explained below −Investment decisions − By calculating WACC, company make the investment decisions by evaluating their present and future projects.Project evaluation with similar risk − When a new project with similar risk is same as existing one in same industry, companies often use WACC as benchmark to decide whether they should go for the projects or not.Project evaluation with different risk − Assumptions like similar risk and similar capital structure enables WACC to evaluate the projects. Certain adjustments will be made with respect to risk and target capital structure.Discount rate − WACC ... Read More
Weighted average cost of capital (WACC) is the computation of company’s cost of capital of each category of capital corresponds to weight. It includes common stock, preferred stocks, bonds and other long term debts. In other words, WACC is the average rate of a company pay to its investors.Increase in WACC means increase in risk. WACC uses by security analysts to assess the value of investment and to determine the pursue. It is also essential to calculate economic value added (EVA). Investors may use WACC to make decisions whether to invest or not. WACC tells about cost of new projects ... Read More
Plan APlan BCommon stockRs. 2000000Rs.500000Preferred stockRs.150000Rs.90000Long term debtRs.250000Rs.8000000Using EBIT-EPS approach, calculate EBIT.SolutionThe solution is given below − (EBIT – In(a)) (1-T) – Pd(a) / OSa = (EBIT – In(b)) (1-T) – Pd(b)) / OSbL.H.S.EBIT = Earnings before interest and tax,In(a) = 250000 * 9% = 22500T = 28%Pd(a) = 150000 * 12% = 18000OSa = 2000000/10 = 200000R.H.S.EBIT = Earnings before interest and tax,In(b) = 8000000 * 9% = 720000T = 28%Pd(b) = 90000 * 12% = 10800OSb = 500000/10 = 50000 (EBIT – In(a)) (1-T) – Pd(a) / OSa = (EBIT – In(b)) (1-T) – Pd(b)) / OSb (EBIT – 22500)(1-0.28) – 18000 / 200000 = (EBIT – 720000) (1-0.28) – 10800 /50000 (EBIT – 22500)*0.72 -18000 = 4{(EBIT -720000)*0.72 – 10800} 0.72EBIT – 34200 = 2.88EBIT – 518400 2.16EBIT = 484200 EBIT = 224166.67/-
Before going for Earnings before interest and tax (EBIT) – Earnings per share (EPS) approach, let us discuss briefly about EBIT and EPS.With the help of Earnings before interest and tax (EBIT), investors and managers can analyse company’s performance without considering balance sheet.With the help of Earnings per share (EPS), investors can measure profit-earning ability of a company and investors will calculate the returns for their shares.EBIT – EPS approach determines optimal capital structure having high EPS for a given EBIT. It also determines best debt and equity ratio that used to finance the business. It examines effect of financial ... Read More
DateParticularsPurchaseSellRemaining01.04.XXXXTotal shares2000001.10.XXXXPreference share is converted to equity share45002450001.01.XXXXShares buyback200022500Considering above data and table. Calculate EPSSolutionThe solution is given below − EPS = (P-Pd) / WACSCalculating Profits minus preference shares (P-Pd).P – Pd = profit before tax – profit after tax rate – preference share dividendsP – Pd = 500000 – {500000 (28%)} - 8000P - Pd = 500000 – 140000 – 8000P – Pd = 352000/-Weighted Average number of shares (WACS).WACS = (20000*(6/12)) + (24500*(3/12)) + (22500*(3/12))WACS = 10000 + 6125 + 5625WACS = 21750/- EPS = (P-Pd) / WACS EPS = 352000 / 21750 EPS = 16.18
Earnings per Share (EPS) are a financial measure that tells about net earnings of a shareholder over a period. In other words, EPS is part of profit distributed to the shareholder. EPS tells whether company can produce net profit for shareholders.It tells about financial health of a company. If EPS is high, it states that company is earning more profits and have ability to distribute those profits to shareholders. If EPS is low, it states that company earnings are not as expected.Categories of EPS are −Trailing EPS − Based on previous year’s numbers.Current EPS − Based on present or current ... Read More
SolutionThe solution is explained below − EBITDA = Np+In+Ta+D+A EBITDA = 175000+20000+35000+8000 EBITDA= 238000/-Here, Np=Net Profit, In=Interest, Ta=Taxes, D = Depreciation, A= Amortization EBITDA= OI*+ D+ A EBITDA = (525000-200000-95000) + 8000 EBITDA = 238000/-Here, OI* = Operating Income, D = Depreciation, A= Amortization(*Operating income (OI) = total revenue – cost of goods sold – operating expenses) EBITDA Coverage Ratio = (EBITDA+LP)/ (IP+PP+LP) EBITDA Coverage Ratio = (238000+15000)/ (5000+7500+15000) EBITDA Coverage Ratio = (253000)/ (27500) EBITDA Coverage Ratio = 9.2Here, LP = Lease payments, IP= Interest payment, PP = Principal payments.
EBITDA means Earnings before interest taxes depreciation and amortizations. EBITDA focus on operating decisions of a business by excluding non-operating decisions.Profitability between companies/industries can analysed by using EBITDA. A positive EBITDA means company is getting profits through its operations and a negative EBITDA means company is not getting profits through its operations and need to re adjust their operations to generate profits.Advantages of EBITDA are as follows −Easy to calculate.Commonly used to compare business valuations.Represents company’s operating performances.Reduces risk.Business growth can be estimated.Disadvantages of EBITDA are as follows −Capital expenditure is not considered.Not fall under GAAP.No particular procedure to calculate.By ... Read More
Earnings before Interest and Tax (EBIT) tell about profitability of a company. It tells about company’s core operation performance. Companies profit includes incomes, expenses.Sometimes EBIT is the amount which deducts all operating expenses from sales revenue, which is called operating income. EBIT is the amount generated in a particular accounting period.Formulasbases on TR, CGS, OEEBIT = TR-CGS-OEHere, TR = Total Revenue, CGS = Cost of Goods Sold, OE = Operating Expensebases on NI, In, TaEBIT = NI+In+TaHere, NI = Net Income, In = interest and Ta = taxesEBIT tells amount money earned by a company from its operations.Investors can compare ... Read More
The word trading means profit earning and equity means owner’s money. In other words, trade of equity means profit is earned through owner’s money. Company will go for trade on equity, when it needs new debt to gain or acquire new assets on which, it can earn high return as compared to normal interest on cost of debt. New debts are issued in the form of bonds, loans or preferred stocks.Objectives are described below −To operate its own trade.Increase rate of dividends.Control source of finance.Increase reputation of a company.Types are as follows −Tiny equity − Share capital is less than ... Read More