Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. Find out the leverage ratio if the capital structure has Rs 4,00,000 equity and Rs 1,60,0 debt.

   Solution

   Leverage ratio = Debt/(equity + debt)

   1,60,000/(4,00,000 + 1,60,000) = 0.2857 = 28.57%

    

2. A company has 5,000 shares of Rs 100 each. It goes for capital restructuring and issues debentures for Rs 2,00,000 to buy back the shares. If the interest rate on debentures is 10% with no tax, find: (a) the leverage ratio after restructuring, and (b) EPS with an EBIT of Rs 1,20,000.

   Solution

   1. Equity = Rs 5,00,000 – 2,00,000 = Rs 3,00,000

      Debt = Rs 2,00,000

      Leverage ratio = 2,00,000/(3,00,000 + 2,00,000) = 0.40 = 40%

   2. EBIT = Rs 1,20,000

      Less interest @ 10% = Rs 20,000

      EBT/NIAT = Rs 1,00,000

      EPS = Rs 1,00,000/3,000 = Rs 33.33