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kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss
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kay Ltd is a company manufacturing textiles it has a share capital of ...
(a) Let the face value of equity share be Rs 10 each.
Profit before Interest & Tax Rs 8,00,000
Interest on 10% debentures Rs 4,00,000
Profit before Tax Profit before Interest and Tax - Interest
Profit before Tax 8,00,000 - 4,00,000 Rs 4,00,000
Thus, shareholders have lost after the issue of debentures as earning per share (EPS) has fallen from Rs 0.5 to Rs 0.4.
(b) Three factors which favour the issue of debentures by the company as part of its capital structure:
1. Good cash flow position: If the company has a good cash flow position, then issuing debentures is more favourable as compared issuing shares.
2. High tax rate: It is beneficial for the company to issue debentures if the tax rate is higher. This is because the interest paid by the company to its debenture holders is tax deductible.
3. Control: If the company does not want to dilute the control of management, then issuing debentures is the best for the company.
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kay Ltd is a company manufacturing textiles it has a share capital of ...
Based on the information provided, the shareholders of Kay Ltd gained from the additional capital raised through issuing 10% debentures.
Here's the calculation to determine the gain:
1. Additional Capital Raised: Rs 40 lakh
2. Earnings per Share (EPS) of the previous year: Rs 0.50
3. Number of shares: Rs 60 lakh / Rs 0.50 = 120 lakh shares
4. Profit earned on capital employment: Rs 8 lakh
5. Tax paid at 40%: Rs 8 lakh * 0.40 = Rs 3.2 lakh
Now, let's calculate the gain:
- The company required additional capital of Rs 40 lakh, and it raised this capital by issuing 10% debentures. This means the company will pay an interest of 10% on this capital, which is Rs 40 lakh * 0.10 = Rs 4 lakh.
- After deducting the interest expense, the company's profit would be Rs 8 lakh - Rs 4 lakh = Rs 4 lakh.
- The company has 120 lakh shares, so the new EPS would be Rs 4 lakh / 120 lakh = Rs 0.0333 per share.
Comparing the new EPS with the previous EPS, we can see that the shareholders gained. The previous EPS was Rs 0.50, and the new EPS is Rs 0.0333. This indicates a decrease in earnings per share, which could be seen as a loss. However, it is important to consider that the company required additional capital for diversification purposes. The interest expense on the debentures reduced the overall profit but enabled the company to expand its operations and potentially increase its future earnings. Therefore, the shareholders gained from the additional capital raised.
Here's the calculation to determine the gain:
1. Additional Capital Raised: Rs 40 lakh
2. Earnings per Share (EPS) of the previous year: Rs 0.50
3. Number of shares: Rs 60 lakh / Rs 0.50 = 120 lakh shares
4. Profit earned on capital employment: Rs 8 lakh
5. Tax paid at 40%: Rs 8 lakh * 0.40 = Rs 3.2 lakh
Now, let's calculate the gain:
- The company required additional capital of Rs 40 lakh, and it raised this capital by issuing 10% debentures. This means the company will pay an interest of 10% on this capital, which is Rs 40 lakh * 0.10 = Rs 4 lakh.
- After deducting the interest expense, the company's profit would be Rs 8 lakh - Rs 4 lakh = Rs 4 lakh.
- The company has 120 lakh shares, so the new EPS would be Rs 4 lakh / 120 lakh = Rs 0.0333 per share.
Comparing the new EPS with the previous EPS, we can see that the shareholders gained. The previous EPS was Rs 0.50, and the new EPS is Rs 0.0333. This indicates a decrease in earnings per share, which could be seen as a loss. However, it is important to consider that the company required additional capital for diversification purposes. The interest expense on the debentures reduced the overall profit but enabled the company to expand its operations and potentially increase its future earnings. Therefore, the shareholders gained from the additional capital raised.
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kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST
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kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST.
kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for kay Ltd is a company manufacturing textiles it has a share capital of Rs 60 lakh in the previous year it's earning per share was Rs 0.50 for diversification the company requires additional capital of Rs 40 lakh the company raised fund by issuing 10�bentures for the same during the year the company earned profit of Rs 8 lakh on capital employment it paid tax @40% state whether the shareholders gained or Liss Related: Indirect ,Short and Long Ans Questions (Q & A) - Ch-9 Financial management, Class 12 BST.
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