(i) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly. |
(ii) Also, state any three factors that favour the issue of debentures by the company as part of its capital structure. |
Answer:
Since, earning per share has fallen from 0.50 to 0.40, therefore the shareholders stand to lose on diversification. Note In the absence of any information, shares are assumed to be of Rs. 10 each. So, Number of Shares \[=\frac{Share\,Capital}{Face\,Value\,Share}=\frac{60,00,000}{10}=6,00,000\,Shares\] (ii) Three factors that favour issue of debentures by the company as part of its capital structure are: [a] Debenture interest payable is a charge to the profits. Hence, a company stands to gain in terms of tax benefits. [b] Issue of debentures help the shareholders of the company to gain through Trading on Equity'. [c] Debenture is a cheaper source of finance as compared to equity. Particulars Amt (Rs.) Profit before Interest and Tax (-) Debentures Interest \[\left( 40,00,000\times \frac{10}{100} \right)\] 8,00,000 (4,00,000) Profit after Interest (-) Tax \[\left( 4,00,000\times \frac{40}{100} \right)\] 4,00,000 (1,60,000) Profit after Tax Earning per Share 2,40,000 \[\frac{\Pr ofit\,after\,Tax}{Number\,of\,Shares}=\frac{2,40,000}{6,40,000}=0.40\]
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