Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. A company has a capital of Rs 10,00,000. The value of its assets amounts to Rs 10,00,000. Its earnings amount to Rs 90,000. The rate of return in the industry is 10%. Does it show optimal capitalisation?

   Solution

   As per the cost theory, capitalisation is optimal insofar as the capital is equal to the cost of the assets.

   But as per the earning theory, its earnings based on industry norms should be equal to: Rs 10,00,000 × 0.10 = Rs 1,00,000

   Since its actual earnings < the required earnings, the company stands over-capitalised.

    

2. The market price of the share of a company is Rs 100. The EPS is Rs 10. The net profit is Rs 50,000. Find the optimal capitalisation.

   Solution

   EPS = 10/100 = 10%

   Amount of capital with Rs 50,000 ...