Capital Structure

(b)Calculate operating and financial leverage under situations A, B and C and financial plans 1, 2 and 3 respectively from the following information and find which plan will give the highest value and the least value.

Installed capacity 1,200 (units)

Actual production and sales 800 (units) Selling price per unit ₹ 15

Variable cost per unit ₹ 10

(iv)What is the Hamada Equation in terms of Capital Structure ?

(iii)How can financial leverage lead to an improvement in EPS ?

Degree of .......... is the ratio of the percentage increase in Earnings Per Share (EPS) to the percentage increase in Earnings Before Interest and Taxes (EBIT).

(A)Financial Leverage

(B)Combined Leverage

(C)Working Capital Leverage

(D)Operating Leverage

High operating leverage shows :

(A)Low burden of fixed cost and high EBIT

(B)Low burden of fixed cost and low EBIT

(C)Higher burden of fixed cost and high EBIT

(D)Higher burden of fixed cost and low EBIT

If the Return on Investment (ROI) exceeds the rate of interest on debt, it is .......... financial leverage.

(A)Negative

(B)Adverse

(C)Unfavorable

(D)Favorable

A company has sales of ₹ 2,00,000. The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage.

(A)4

(B)3

(C)2

(D)1.5

Which of the following is not included in capital structure ?

(A)Current liabilities

(B)Long-term debt

(C)Preferred stock

(D)Retained earnings

If the interest costs are high, the operating leverage will be :

(A)High

(B)Negative

(C)Undetermined

(D)Low

(iv)What is the connection between Risk and Leverage in terms of capital structure ?

If there is no operating leverage in a firm, it is indicative of absence of :

(A)Operating Profit

(B)Sales

(C)Fixed Cost

(D)Variable Cost

Which of the following shows the significance of capital structure ?

(A)Capital structure reflects the overall financing strategy of the firm

(B)One can get a reasonably accurate broad idea about the risk profile of the firm from its capital structure

(C)Capital structure also acts as a tax management tool

(D)All of the above

While considering the Horizontal capital structure, which of the following statements is correct ?

(1)It is quite stable

(2)It is formed by a small amount of equity share capital

(3)There is an absence of debt

(4)It has an increasing component of debt

Select the correct answer from the options given below :

(A)(1), (2) and (4)

(B)(2) and (3)

(C)(1) and (3)

(D)(1) and (4) only

Which of the following is correct in case financial leverage is considered by a firm ?

(A)The shareholders will be exposed to greater risk

(B)A firm will always have higher earnings per share than pre-financial leverage stage

(C)There will be no change in firm’s taxes

(D)The earnings per share will remain constant even after adopting leverage

Consider the following financial information :

Combined leverage = ?

(A)1.63

(B)1.69

(C)1.67

(D)1.61

A firm has a DFL of 9.5. What does this tell us about the firm ? Assume 40% tax.

(A)If sales rise by 9.5%, then EBIT will rise by 1%

(B)If EBIT rises by 5.7%, then EPS will rise by 1%

(C)If EBIT rise by 1%, then EPS will rise by 9.5%

(D)If sales rise by 1%, then EBIT will rise by 5.7%

A firm has EBIT of ₹ 50,000. Market value of 10% debt is ₹ 80,000 and overall capitalization rate is 20%. Market value of Equity under NOI Approach will be ₹ :

(A)2,50,000

(B)1,70,000

(C)30,000

(D)1,30,000

Magma Ltd. is a manufacturing industry which has a mix of equity and debt to finance its business. The company is growing at a considerable rate prompting the management to go for expansion. The company is considering various alternatives to raise funds for the same.

The capital structure of Magma Ltd. is as follows :

Additional Information :

(1)Equity shares are sold in the market at ₹ 25 per share. The company is contemplating the declaration of dividend of ₹ 3 per share at the end of the current financial year. The company has a practice of paying all earnings in the form of dividend.

(2)₹ 100 per debenture (first issue) redeemable at par has 2% floatation cost and 8 years of maturity. The market price per debenture is ₹ 120.

(3)The second issue of debentures ( ₹ 100 each) is redeemable after 5 years and are currently selling at ₹ 90 per debenture.

(4)₹ 100 per preference share redeemable at par has 3% floatation cost and 10 years of maturity. The market price per preference share is ₹ 108.

(5)The tax rate applicable to the company is 30%.

(6)The shareholder’s tax liability may be assumed as 25% whereas the capital gain tax is 20%.

The CFO of the company is keen at understanding the cost of capital. Accordingly, you are appointed to complete the following tasks :

(1)Find out the weighted average cost of capital using :

(a)Book value weights.

(b)Market value weights.

(2)Further the company also intends to know the market price of the equity shares at the end of the current year using MM approach along with citing the assumptions of the theory.

(3)Assuming the company has sales of ₹ 20 lakh, variable cost of ₹ 12 lakh and fixed cost of ₹ 5 lakh (excluding of interest), calculate operating leverage, financial leverage and combined leverage.

Which one of the following approaches of the capital structure pleads that debt financing initially increases the value of the firm; however excess debt financing beyond a particular point reduces the value of the firm ?

(A)Net income approach

(B)Net operating income approach

(C)Traditional approach

(D)M&M approach

Mr. Dashan recently came back from a conference titled Capital Structure Theory and was extremely excited about what he learned concerning Modigliani and Miller’s capital structure propositions. He has been trying to choose between three potential capital structures for his firm, Dashmart Corporation, and believes that Modigliani and Miller’s work may guide him in the right direction. The capital structures Mr. Dashan is considering are :

CS I : 100% equity.

CS II : 50% equity and 50% debt.

CS III : 100% debt.

If he uses Modigliani and Miller’s propositions and includes all their assumptions including the assumption of no taxes, which capital structure is he most likely to choose ? Which capital structure would be chosen in case of tax regime ?

(A)CS I and CS II

(B)CS I and CS III

(C)CS II and CS III

(D)Any of the above CS I, II and III

Assertion (A) : The capital structure should involve minimum risk of financial insolvency.

Reason (R) : The use of excessive debt threatens the solvency of the company.

(A)Both (A) and (R) are true and (R) is correct explanation of (A)

(B)Both (A) and (R) are true but (R) is not correct explanation of (A)

(C)(A) is true, but (R) is false

(D)(A) is false, but (R) is true

.............. helps to analyze the level of fixed cost which is invested in day-today activities of business firm.

(A)Operating Leverage

(B)Financial Leverage

(C)Combined Leverage

(D)Profit Volume relationship

When EBIT is less than Finance Break-even point, the result is ................. .

(A)Positive Financial leverage

(B)Negative Financial leverage

(C)Higher Financial Leverage

(D)No Financial leverage

If the combined leverage and operating leverage figures of a company are 2.5 and 1.25 respectively, find the financial leverage and P/V ratio, given that the equity dividend per share is ₹ 2, interest payable per year is ₹ 1 lakh, total fixed cost ₹ 0.5 lakh and sales ₹ 10 lakhs.

(A)3.125; 25%

(B)2.00; 40%

(C)2.00; 25%

(D)3.00; 40%

Trading on equity represents :

(A)high volume of equity shares traded on stock market.

(B)use of equity trading to enhance the returns of long-term interest bearing funds.

(C)use of equity trading to enhance the returns of preferred funds.

(D)use of long-term interest bearing funds to enhance return on equity.

.................. is also known as double edged sword.

(A)Operating leverage

(B)Financial leverage

(C)Combined leverage

(D)Financial break-even point

Following data is available for A Ltd.

Financial Leverage - 3 : 1, Interest - ₹ 2,000, Operating Leverage - 4 : 1, Variable cost (% to sales) - 66.67%, Income Tax Rate - 45%. Amount of contribution will be :

(A)₹ 6,000

(B)₹ 12,000

(C)₹ 36,000

(D)₹ 18,000

Operating leverage is 8 and financial leverage is 2.2769. How much change in sales will be required to bring 80% change in EBIT ?

(A)10%

(B)80%

(C)11.429%

(D)30%

(d)RST Ltd. has a capital of ₹ 10,00,000 in equity shares of ₹ 100 each. The shares are currently quoted at par. The company proposes to declare a dividend of ₹ 10 per share at the end of the current financial year. The capitalization rate for the risk class of which the company belongs is 12%.

You are requested to calculate market price of the share at the end of the year, if

(i)Dividend is not declared.

(ii)Dividend is declared.

(iii)Assuming that the company pays the dividend and has net profits of ₹ 5,00,000 and makes new investments of ₹ 10,00,000 during the period, how many new shares must be issued ? Use the MM model.

(ii)Explain Hamada Equation and also calculate Hamada coefficient using following information. A company has a debt to equity ratio of 0.65 : 1.00, a tax rate of 35% and an unlevered beta of 0.80.

Which of the following is TRUE for Net Income Approach ?

(A)Lower Equity is better

(B)Lower Debt is better

(C)Debt-Equity ratio is irrelevant

(D)None of the above

Which of the following statements is TRUE ?

(A)If Fixed cost rises, DOL and EPS rises

(B)If Sales rises, DOL increases and EPS reduces

(C)If EBIT increases, DFL increases and EPS reduces

(D)Higher the DFL higher the financial risk and vice versa

Which of the following is considered to be the optimal combination ?

(A)Low DOL & Low DFL

(B)High DOL & High DFL

(C)High DOL & Low DFL

(D)Low DOL & High DFL

Which of the following statements is TRUE ?

(A)Higher fixed cost implies higher DOL & lower DFL

(B)Lower fixed cost implies lower DOL & higher DFL

(C)No Fixed cost implies DOL = 1 & DFL = 2

(D)None of the above

This refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets are acquired from the current shareholders typically with the use of financial leverage.

(A)Venture Capital

(B)Growth Capital

(C)Leveraged Buyout (LBO)

(D)None of the above

Which of the following statements is true ?

(A)There is no restriction on a company to be an all debt company. Debt can be raised even without any equity base in the company

(B)Debt can be raised by a company only on an adequate equity base which serves as a cushion for debt financing

(C)The component of debt and equity mix in capital structure has been prescribed by the Companies Act, and it is mandatory for companies to adhere to it.

(D)All the above are false.

A capital structure that has small component of equity capital, reasonable level of retained earnings and an ever increasing component of debt is termed as :

(A)Vertical Capital Structure

(B)Inverted Pyramid Shaped Capital Structure

(C)Horizontal Capital Structure

(D)Pyramid Shaped Capital Structure

Which of the following statements is false ?

(A)Financial structure refers to all the components of finance in an organization. It consists of all assets, all liabilities and capital of the firm

(B)The manner in which an organization’s assets are financed is referred to as its financial structure. It consists of all the long-term and short-term sources of capital

(C)The entire left hand side of balance sheet including all the liabilities and equity is referred to as financial structure of the company

(D)All the above are true

Which of the following statements is true ?

(A)Optimal capital structure means a particular arrangement of various components of the capital which is in tune with long-term objectives of the firm

(B)Optimal capital structure means a particular arrangement of various components of the capital which is in tune with short-term objectives of the firm

(C)Optimal capital structure means a particular arrangement of various components of the capital which is in tune with both, long-term and shortterm objectives of the firm

(D)Optimal capital structure has nothing to do with objectives of the firm, and it is series of capital budgeting decisions that adheres the firm’s objectives

When an investor wishes to magnify the impact of change in sales into a relatively larger change in earning per share, it shall use :

(A)Operating Leverage only

(B)Financial Leverage only

(C)Both Operating and Financial Leverage

(D)Leverage won’t help

A firm’s fixed operating cost is ₹ 40,000. Its degree of operating leverage is 3. If its contribution is 20% of sales, the amount of variable cost will be ( ₹ ) :

(A)60,000

(B)3,00,000

(C)2,40,000

(D)2,60,000

Which of the following statements is false ?

(A)Indifference point is the point of sales at which different sets of debt ratios results in same earning per share

(B)Indifference point is that level of EBIT below which the benefits of financial leverage with respect to EPS exists

(C)Indifference point is that level of EBIT beyond which the benefits of financial leverage with respect to EPS extinguishes

(D)All of the above

Which of the following statements is false ?

(A)As the financial leverage increases, the firm is required to sell more of its products/services in order to break even

(B)Higher financial leverage increases the risk to lenders due to increased probability of bankruptcy

(C)Increase in financial leverage increases the risk to stockholders because higher leverage will cause greater volatility in earnings and greater volatility in stock prices

(D)None of the above

Which of the following are assumptions of Net Income Approach of Capital Structure Theory ?

(A)Cost of equity is more than cost of debt.

(B)Both cost of debt and cost of equity remain constant and increase in financial leverage does not affect the risk perception of investors.

(C)There are no taxes.

(D)All of the above

Capital Structure of A Ltd. comprises of the following :

If EBIT is ₹ 6 lakh, degree of Financial Leverage is :

(A)1.3

(B)1.2

(C)2

(D)1.5

In terms of difference between operating leverage and financial leverage, which of the following is incorrect?

(A)Operating Leverage is associated with investment activities of the company, whereas Financial Leverage is associated with financing activities of the company.

(B)Operating Leverage consists of fixed operating expenses of the company, whereas financial leverage consists of fixed financial expenses of the company.

(C)Operating Leverage represents the firm's ability to use the fixed operating cost, whereas financial leverage represents the firm's ability to use the fixed financial cost.

(D)Operating Leverage is calculated as EBIT/EBT, whereas financial leverage is calculated as Contribution/EBIT

Based on the following financials of a company, what will be its combined leverage?

Tax rate : 30%

(A)2 times

(B)1.5 times

(C)1.75 times

(D)2.5 times

The degree of financial leverage of a firm is 2 and degree of its operating leverage is 4. Fixed cost is ₹ 60,000 and variable cost as a percentage of sales is 60. Applicable tax rate is 30%. Earnings after tax (EAT) of the firm will be :

(A)₹ 8,400

(B)₹ 10,000

(C)₹ 7,000

(D)₹ 9,100

X Ltd., a leather manufacturing company, has a Sales turnover of ₹ 40 Lakh for the year ended 31/03/2021. Its variable cost for the year was ₹ 20 Lakh and fixed cost was ₹ 5 lakh. It issued debentures worth 10 Lakh on 01/10/2020 carrying an interest rate of 8% p.a. The financial leverage of the company will be :

(A)1.15

(B)1.05

(C)1.03

(D)1.13

The capital structure of A Ltd. comprises of the following :

Equity Share Capital : ₹ 4 lakh 8%

Debentures : ₹ 1 lakh

Value of Beta is 2, associated risk-free rate of return and market risk premium are 5% and 4% respectively. A Ltd. falls in 30% tax bracket.

The weighted average cost of capital of the company will be :

(A)11.12%

(B)11.32%

(C)11.52%

(D)11.72%

The XYZ Co. Ltd. borrowed capital is NIL and entire capital block of ₹ 300 lakh is funded by owners. Earning Before Interest and Tax (EBIT) for the year @ 28.50%, applicable tax rate @ 45%. Calculate Earning After Tax (EAT).

(A)₹ 42.50 Lakh

(B)₹ 47.03 Lakh

(C)₹ 42.60 Lakh

(D)₹ 42.75 Lakh

ABC Ltd. has borrowed capital of ₹ 100 lakh and rate of interest is 12%. Owners capital ₹ 400 lakh and EBIT for the year is 10% against the sales of ₹ 1200 lakh. Applicable tax rate is 50%. Determine the percentage of return on investment to owners fund.

(A)12.50%

(B)13.25%

(C)13.50%

(D)14.50%

A Ltd., informed Profit After Tax (PAT) ₹ 7,50,000. Interest expenses were ₹ 2,75,000, tax rate was 40%. What will be the Net Operating Income of A Ltd. ?

(A)₹ 13,25,000

(B)₹ 14,25,000

(C)₹ 13,75,000

(D)₹ 15,25,000

The financial leverage can be arrived by using the formula :

(A)Operating Profit/Profit After Tax

(B)Profit After Tax/EBIT

(C)EBIT/EPS

(D)EBIT (Operating Profit)/Profit Before Tax

NM Co. Ltd., reported sales for the year 50 lakh and variable cost ratio is 57% and fixed cost of admin and selling and distribution as 9.50 and 4.80 and 3.90 lakh, respectively. The resulting operating leverage is :

(A)6.72 Times

(B)6.89 Times

(C)6.52 Times

(D)6.69 Times

There are four approaches to capital structure decisions :

(1)Net Income

(2)Net Operating Income

(3)........................ (4) .....................

(A)Modern Capital Theory, Traditional

(B)Traditional, Gross Income

(C)Traditional, Michael Miller

(D)Modigliani Miller, Traditional

Which of the followings are the type of capital structure ?

(1)Horizontal

(2)Polygon

(3)Pyramid

(4)Inverted Pyramid

(5)Rhombus

(6)Vertical

(A)6, 5, 4 and 3

(B)5, 4, 3 and 2

(C)1, 3, 4 and 6

(D)1, 3, 4 and 5

Das Co. Ltd., EBIT for the year 15 lakh interest @ 12.5% loan capital of 40 lakh and 13.75% loan capital of 30 lakh and soft loan interest @ 5.50% against loan capital of 75 lakh.

Company’s EBT as % to EBIT is:

(A)11.67%

(B)11.33%

(C)11.37%

(D)11.55%

AXN Co. Ltd., has two products X and Y. Y’s selling price @ 120% of X and sales volume of ‘X’ as 150% of Y’s sales of 3,00,000 units @ 90 per unit. The variable cost per unit ‘X’ and ‘Y’ is 70 and 88 respectively and Fixed Cost 8.50 lakh per annum. Calculate operating leverage :

(A)1.43

(B)1.58

(C)1.92

(D)1.25

Which of the following statement is correct, related to fixed charges like interest on debt?

(A)Higher the fixed charges, greater the risk

(B)Higher the fixed charges, lower the risk

(C)Higher the fixed charges, no change in the risk

(D)Higher the fixed charges, risk may either be lower or higher

When EBIT is higher than Financial Breakeven point, there would be :

(A)Positive Financial Leverage

(B)No Financial Leverage

(C)Higher Financial Leverage

(D)Nagative Financial Leverage

A critical assumption of the net operating income (NOI) approach to valuation is:

(A)That debt and equity levels remain unchanged

(B)That dividends increase at a constant rate

(C)That ko remains constant regardless of changes in leverage

(D)That interest expense and taxes are included in the calculation

Capital structure of ABC Ltd. consists of equity share capital ₹ 1,00,000 (10000 share of @ ₹ 10 each) and 8% debentures of ₹ 50,000 & earnings before interest and tax is ₹ 20,000. The degree of financial leverage is :

(A)1

(B)1.25

(C)2

(D)2.5

Degree of combined leverage is the fraction of :

(A)Percentage change in EBIT on Percentage change in Sales

(B)Percentage change in EPS on Percentage change in Sales

(C)Percentage change in Sales on Percentage change in EPS

(D)Percentage change in EPS on Percentage change in EBIT

From the following information, calculate combined leverage :

@ 8% p.a.

(A)7

(B)0.9

(C)9

(D)10

The ................. is the percentage change in earnings per share that results from a percentage change in operating income.

(A)Degree of combined leverage

(B)Degree of financial leverage

(C)Break-even point

(D)Degree of operating leverage

Which kind of capital structure has a large proportion consisting of equity capital and retained earnings which have been ploughed back into the firm over a considerably large period of time :

(A)Pyramid shaped Capital structure

(B)Horizontal Capital Structure

(C)Vertical Capital Structure

(D)Inverted Pyramid shaped Capital Structure

Sachin Company has sales of ₹ 75,00,000. Variable cost of ₹ 45,00,000 and fixed cost of ₹ 15,00,000. Operating leverage will be :

(A)1

(B)2

(C)3

(D)4

Calculate the value of the firm MNP Ltd. according to the Net Income Approach. The company expects a net operating income of ₹ 80,000. It has ₹ 2,00,000, 8% Debentures. The equity capitalization rate of the company is 10%. (ignore the Income Tax).

(A)₹ 8,40,000

(B)₹ 8,60,000

(C)₹ 8,80,000

(D)₹ 8,90,000

ABC Ltd. expects a net operating income of ₹ 1,00,000. It has ₹ 5,00,000, 6% Debentures. The overall capitalization is 10%. Calculate cost of equity according to the Net Operating Income Approach.

(A)14%

(B)21%

(C)18%

(D)21.8%

Compute the average cost of capital by using market value as weights from the following information :

Net Operating Income ₹ 2,00,000, Total Investment ₹ 10,00,000, if the firm uses 5% debenture of ₹ 4,00,000 and equity capitalization rate is 11%.

(A)20%

(B)9.9%

(C)9.82%

(D)11%

A company PQR Ltd. has EBIT of ₹ 2,00,000. Expected return on its Investment @ of 12%. What is the total value of the firm according to Miller-Modigliani theory ?

(A)₹ 16,66,667

(B)₹ 17,85,714

(C)₹ 20,00,000

(D)₹ 22,40,000

A firm has EBIT of ₹ 50,000. Market value of debt is ₹ 80,000 and overall capitalization rate is 20%. Market value of equity under NOI Approach is :

(A)₹ 1,70,000

(B)₹ 2,50,000

(C)₹ 30,000

(D)₹ 1,30,000

X company has sales of ₹ 12,00,000, Variable Cost is 50% and fixed cost ₹ 2,50,000. Operating leverage of the company is :

(A)1.33

(B)1.67

(C)1.71

(D)2

A firm provides the following information :

Sold 2,00,000 units @ ₹ 30 per unit; Variable cost ₹ 15 per unit, fixed cost ₹ 10,00,000 and debt of ₹ 10,00,000 at 10% rate of interest. Calculate the degree of Financial leverage.

(A)1.5

(B)0.66

(C)1.053

(D)Insufficient information

Decisions related to the mix of debt and equity in the balance sheet best relates to which of the following ?

(A)Capital budget

(B)Capital structure

(C)Capital expenditure

(D)Operating leverage

Which approach in capital structure argues that the overall capitalization rate and the cost of debt remains constant for all degrees of leverage, as the same is offset by an increase in the equity capitalization rate ?

(A)NI Approach

(B)NOI Approach

(C)Walter’s Approach

(D)Gordon’s Approach

A firm has a Degree of Operating Leverage (DOL) of 5 and Degree of Financial Leverage (DFL) of 4. The interest burden is ₹ 300 Lakhs, variable cost as a % to sales is 75%, and the effective tax rate is 45%. Its fixed cost is :

(A)₹ 1600 Lakhs

(B)₹ 1450 Lakhs

(C)₹ 1500 Lakhs

(D)₹ 1700 Lakhs

If a company acquired a helicopter for its top management for a certain period on a fixed payment, which of the following will be true regarding leverage ?

(A)DOL will increase

(B)DFL will increase

(C)DOL will decrease

(D)DCL will remain unchanged

Which of the following is not a valid assumption of MM approach to capital structure ?

(A)Securities are infinitely divisible

(B)Lack of free flow of information

(C)Transactions costs are zero

(D)No taxation

A firm has a DOL of 6 at a certain production level. If Sales of the firm rise by 1%, it implies that :

(A)EBIT will also rise by 1%

(B)EBIT will rise by 1/6%

(C)EBIT will rise by 6%

(D)Change in EBIT is undecided

(c)Net Income Approach and Net Operating Income Approach.

(b)Hindustan Chemical Ltd. has operating and capital structure with financial plan A and B under situations I and II. Annual production and sales are 75% of installed capacity.

Compute the operating, financial and combined leverage of financial plan A and B under situation I and II. And also interpret combined leverage with reference to highest value and lowest value under both financial plans as well as situations from the following information :

Total 70,000 70,000

(c)From the following data, calculate the degree of operating leverage of the two companies X Ltd. and Y Ltd. :

Also state which company has the greater business risk and why ?

(i)Company X and Company Y are in the same risk class, and are identical in every respect except that company X uses debt, while company Y does not. The levered firm has ₹ 4,50,000 debentures, carryng 10% rate of interest. Both the firms earn 20% operating profit on their total assets of ₹ 7,50,000. Assume perfect capital markets, rational investors and so on; a tax rate of 35% and capitalisation rate of 15% for an all-equity company. Compute the value of company X and Y using the Net Income (NI) approach.

(b)A new project requires outlay of ₹ 800 lakhs. The amount maybe raised through issue of equity shares of ₹ 400 each or by issuing equity shares of value ₹ 600 lakhs and loan of ₹ 200 lakhs at 14% interest.

Assuming income tax rate at 25%, calculate EBIT levels that would keep equity investors indifferent to the two options.

A Company has equity share capital of ₹ 20 Lakh ( ₹ 100 each), 9% pref, shares of ₹ 10 Lakh ( ₹ 100 each), and 8 % Bank Loan of ₹ 5,00,000. If Applicable income tax rate is 25%, the financial breakeven point of the company will be ₹ :

(A)1,50,000

(B)1,40,000

(C)1,60,000

(D)1,20,000

A company needs ₹ 31,25,000 for the construction of new Cold Storage plant. The following two plans are feasible :

(A)Company may issue 3,12,500 equity shares at 10 per share.

(B)Company may issue 1,56,250 ordinary equity shares at 10 per share and 15,625 debentures of 100 denomination bearing 8% rate of interest. Corporate income-tax rate is 30%. The indifference point will be ( ₹ ) : (A) 2,30,000 (B) 2,50,000

(C)2,75,000

(D)3,50,000

Tarmarind Ltd. wants to implement a project for which ₹ 25 lakhs is required. Following financing options are at hand :

Option 1 :

Calculate the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.

(A)₹ 2,94,872; ₹ 11.80

(B)₹ 3,20,513; ₹ 8.33

(C)₹ 2,94,872; ₹ 7.67

(D)₹ 3,20,513; ₹ 12.82

Skyline Software Ltd. wants to implement a project for which ₹ 30 lakh is required. Following financing options are at hand : Option 1 : Equity Shares 30,000 nos. @ ₹ 100 each Option 2 : Equity Shares 10,000 nos . @ ₹ 100 each, 12% Preference Shares 5,000 nos. @ ₹ 100 each, and 10% Debentures 15,000 nos. @ ₹ 100 each Calculate the indifference point (level of EBIT) assuming corporate tax to be 35%.

(A)₹ 3,63,462

(B)₹ 3,53,562

(C)₹ 3,33,662

(D)₹ 3,66,762

A firm is considering investment in a project that requires ₹ 50 Lakhs. Either the firm can invest the entire amount through equity shares of ₹ 100 each (option A), or it can arrange 10% Bank Loan of ₹ 30 Lakhs and invest remaining amount equity shares of ₹ 100 each (option B). Assume a tax rate of 30%. The indifference point of these two options will be :

(A)₹ 3,50,000

(B)₹ 5,00,000

(C)₹ 6,00,000

(D)None of the above

A company is contemplating investment in a project requiring ? 72 Lakh. For the same, two options are available. Option I is 100% equity option where equity shares of face value ₹ 100 each will be issued at 20% premium. Option II encompasses taking a bank loan of ₹ 50 Lakhs and raising remaining amount through equity shares at par. If the loan can be raised at 10% per annum, and applicable income tax rate is 30%, the approximate indifference point will be :

(A)₹ 7,98,474

(B)₹ 6,98,450

(C)₹ 7,89,474

(D)₹ 6,89,450

A project requires a capital outlay of ₹ 400 Lakh. The required amount can be raised either by issuing equity shares of the face value ₹ 400 Lakh, or by issuing equity shares to the extent of ₹ 200 Lakh and acquiring 15% debt of 200 Lakh. Assuming a tax rate of 40%, the indifference point of both the financing options will be :

(A)₹ 40 Lakh

(B)₹ 50 Lakh

(C)₹ 60 Lakh

(D)₹ 70 Lakh

The financial breakeven point is :

(A)Level of EBT at which EPS is zero

(B)Level of EAT at which EPS is zero

(C)Level of EBIT at which EPS is zero

(D)Level of EBIT at which EPS is zero and above

An EBIT-EPS indifference analysis chart is used for .......................

(A)Evaluating the effects of business risk on EPS

(B)Examining EPS results for alternative financing plans at varying EBIT levels

(C)Determining the impact of a change in sales on EBIT

(D)Showing the changes in EPS quality over time

SKY Ltd. is considering three different financing alternatives — debt, preferred stock and common equity. The firm has created an EBIT-EPS chart that shows several indifference points. What does each indifference point show the firm ?

(A)The level of EBIT that generates identical EPS under different alternative financing plans.

(B)The level of sales that generates identical EBIT and EPS figures.

(C)It shows the level of EBIT and EPS at which DFL is identical under different alternative financing plans.

(D)None of the above

................ of an organisation refers to the composition of its long-term funds and its capital structure.

(A)Capitalisation

(B)Over-capitalisation

(C)Under-capitalisation

(D)Market capitalization