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A company requires capital funds of rs 5 crores and has two options (a) to raise the amount by the issue of 15% debentures and, (b) to issue equity shares at a rate of rs 20 per share. It already has 40lacs equity shares issued and debt financing of rs 6 crores at the rate of 12% find out the expected efs under both financing options at the given ebit levels of rs 2crores and rs 7.5 crores what should be choice of the company given that the applicable tax rate is 50%?
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A company requires capital funds of rs 5 crores and has two options (a...
Introduction
A company needs to raise Rs 5 crores for capital funds and has two options - issuing 15% debentures or issuing equity shares at Rs 20 per share. The company already has 40lacs equity shares and debt financing of Rs 6 crores at 12%. The company wants to know the expected EFS under both financing options at EBIT levels of Rs 2 crores and Rs 7.5 crores, and which option is better.

Calculation of EFS
To calculate EFS, we need to use the following formula:
Earnings available to equity shareholders = EBIT – Interest on debt – Tax

Option A: 15% Debentures
- The amount to be raised is Rs 5 crores.
- Interest on debentures = Rs 5 crores * 15% = Rs 75 lakhs
- Interest on existing debt = Rs 6 crores * 12% = Rs 72 lakhs
- Total interest = Rs 75 lakhs + Rs 72 lakhs = Rs 1.47 crores
- Earnings available to equity shareholders at EBIT of Rs 2 crores = Rs 2 crores – Rs 1.47 crores * (1-0.5) = Rs 26.5 lakhs
- Earnings available to equity shareholders at EBIT of Rs 7.5 crores = Rs 7.5 crores – Rs 1.47 crores * (1-0.5) = Rs 4.76 crores

Option B: Equity Shares
- The amount to be raised is Rs 5 crores / Rs 20 per share = 25 lakhs shares
- Total number of equity shares after the issue = 40 lakhs + 25 lakhs = 65 lakhs shares
- Interest on existing debt = Rs 6 crores * 12% = Rs 72 lakhs
- Earnings available to equity shareholders at EBIT of Rs 2 crores = Rs 2 crores – Rs 72 lakhs * (1-0.5) = Rs 1.04 crores
- Earnings available to equity shareholders at EBIT of Rs 7.5 crores = Rs 7.5 crores – Rs 72 lakhs * (1-0.5) = Rs 3.54 crores

Conclusion
- Earnings available to equity shareholders are higher under option A (15% debentures) at EBIT of Rs 2 crores.
- Earnings available to equity shareholders are higher under option B (Equity shares) at EBIT of Rs 7.5 crores.
- The company should choose the financing option based on its expected EBIT level. If the company expects a higher EBIT level, it should go for option B (Equity shares), and if it expects a lower EBIT level, it should go for option A (15% debentures).
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A company requires capital funds of rs 5 crores and has two options (a) to raise the amount by the issue of 15% debentures and, (b) to issue equity shares at a rate of rs 20 per share. It already has 40lacs equity shares issued and debt financing of rs 6 crores at the rate of 12% find out the expected efs under both financing options at the given ebit levels of rs 2crores and rs 7.5 crores what should be choice of the company given that the applicable tax rate is 50%?
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A company requires capital funds of rs 5 crores and has two options (a) to raise the amount by the issue of 15% debentures and, (b) to issue equity shares at a rate of rs 20 per share. It already has 40lacs equity shares issued and debt financing of rs 6 crores at the rate of 12% find out the expected efs under both financing options at the given ebit levels of rs 2crores and rs 7.5 crores what should be choice of the company given that the applicable tax rate is 50%? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about A company requires capital funds of rs 5 crores and has two options (a) to raise the amount by the issue of 15% debentures and, (b) to issue equity shares at a rate of rs 20 per share. It already has 40lacs equity shares issued and debt financing of rs 6 crores at the rate of 12% find out the expected efs under both financing options at the given ebit levels of rs 2crores and rs 7.5 crores what should be choice of the company given that the applicable tax rate is 50%? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A company requires capital funds of rs 5 crores and has two options (a) to raise the amount by the issue of 15% debentures and, (b) to issue equity shares at a rate of rs 20 per share. It already has 40lacs equity shares issued and debt financing of rs 6 crores at the rate of 12% find out the expected efs under both financing options at the given ebit levels of rs 2crores and rs 7.5 crores what should be choice of the company given that the applicable tax rate is 50%?.
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