Assets (Rs.)Liabilities (Rs.)Owners’ equity (Rs.)5000022000XXX11600XXX560010000055000XXX50000XXX290004500016000XXX41300XXX36500SolutionThe solution is explained below −We know accounting equation => Assets = Liabilities + Owner’s equityAssets (Rs.)=Liabilities (Rs.)+Owners’ equity (Rs.)50000=22000+2800011600=6000+5600100000=55000+4500050000=21000+2900045000=16000+2900041300=4800+36500

SolutionThe solution is explained below −We need to calculate preferred dividends, net interest expense before calculating financial breakeven pointPreferred dividends = preferred stock * 6% = 150*6% => $9 millionNet interest expense = total interest expenses – interest income= 150*6% => $9 millionNet interest expense = total interest expenses – ... Read More

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= ... Read More

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 = ... Read More

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 => ... Read More

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 ... 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 ... 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% ... Read More

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), ... 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 ... Read More