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Articles on Trending Technologies
Technical articles with clear explanations and examples
Differentiate between accounting breakeven point and financial breakeven point.
The major differences between accounting breakeven point and financial breakeven point are given below −Accounting breakeven pointIt is the number of units sold to cover costs.It is an easy method.Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.Accounting breakeven point = (TFC/PPU)-VC (Where TFC= Total fixed cost, PPU = price per unit, VC = variable costZero operating margin is calculated.Financial breakeven point −It is the number of units sold to cover costs.It is an easy method.Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.Accounting breakeven point = (TFC/PPU)-VC ...
Read MoreCalculate weighted average cost of capital of a ABC ltd with the following data.
Amount in RsAfter tax cost in %Equity share capital75000013%Retained earnings48000014%Preference share55000011%CapitalDebentures5750009.75%2355000SolutionThe solution is mentioned below −Amount in Rs.XAfter tax cost inYEquity share capital750000 (A)(A)/(Z)=0.32 (x1)0.13 (a)(a)*(x1)=0.0416Retained earnings480000 (B)(B)/(Z)= 0.20 (x2)0.14 (b)(b)*(x2)= 0.028Preference share capital550000 (C)(C)/(Z)= 0.23 (x3)0.11 (c)(c)*(x3)= 0.0253Debentures575000 (D)(D)/(Z)= 0.25 (x4)0.0975 (d)(d)*(x4)= 0.0244Total (Z)23550000.1193Weighted average cost of capital = 11.93%That means, company is paying 11.93% premium to the investors.
Read MoreCalculate weight average cost of capital of a company XYZ using below assumption data.
Number of outstanding shares2500000Price of each shareRs. 48/-Market value for bondsRs. 30000000/-Risk free rate ( 10 year treasury)2.75%Cost of rate of return on company bonds (cost of return)5.90%Corporate tax22.25%Investor risk premium5.60%Company stock beta1.25SolutionThe solution is mentioned below −Market value (A) = no.of shares * price => 2500000 * 48 => Rs. 120000000/-Determine company debt = 30000000Cost of equity = 2.75% +5.60*1.25 => 0.0975Cost of debt = 5.90*(1-22.25%) => 0.046Weight of cost of capital = (R/V*Ke)+(D/V)*Kd*(1-tax rate)=(120000000/150000000)*0.0975 + (30000000/150000000)*0.046= 0.078+0.0092= 0.0872= 8.72 %
Read MoreWhat is the importance and limitation of weighted average cost of capital?
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 MoreWhat is weighted average cost of capital (WACC)?
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 MoreHow to compare different financial plans?
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/-
Read MoreExplain Earnings before interest and tax (EBIT) – Earnings per share (EPS) approach in capital structure.
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 MoreIf a company's profit before tax is Rs.500000/- and tax rate is 28%, preference share dividend is Rs.8000/-
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
Read MoreExplain Earnings per share (EPS) in financial management.
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 MoreWhat are steps involved in calculating EBITDA and EBITDA coverage ratio or How EBITDA and EBITDA ratio is calculated?
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.
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