Capital Structure and Financing Decisions Quiz

Earnings Per Share (EPS) Calculation

• Formula: EPS = (Net Income - Preferred Dividends) / Average Outstanding Shares
• It is a key metric for evaluating a company's profitability on a per-share basis.

Total Equity Share Capital of GD Ltd

• Total equity share capital is determined by multiplying the number of shares by their nominal value, providing insight into the company's financial structure.

Tax Rate in EPS Calculation

• A tax rate of 40% is commonly used in EPS calculations, impacting the net income available for shareholders.

Financial Scheme and EPS

• Various financial schemes can result in differing EPS values, with some combinations of equity and debt leading to higher EPS due to lower interest costs or more efficient capital use.

Preference Shares Effect on EPS in Plan D

• Including preference shares generally dilutes the EPS as fixed dividends are paid, reducing the income available for ordinary shareholders.

Significance of EBIT

• Earnings Before Interest and Taxes (EBIT) is critical as it reflects a company's operational performance without the effects of capital structure and tax strategy.

Price Earnings (P/E) Ratio Calculation

• P/E Ratio = Market Price per Share / Earnings Per Share (EPS)
• This ratio measures investor expectations and relative valuation.

Financing Alternatives for Expansion

• Common alternatives include issuing equity shares, debentures, or preference shares, each influencing capital structure and EPS differently.

Company’s Capital Structure Breakdown

• The capital structure may include a mix of equity, preference shares, and debt instruments, which helps in understanding the risk and return dynamics.

Impact of Tax Rate on Earnings

• A higher tax rate reduces Earnings After Tax (EAT), which in turn decreases the EPS, affecting investor perception and valuation.

Influence of EBIT on Financing Decisions

• Higher EBIT implies greater capacity to service debt, influencing decisions on whether to raise funds through equity or debt.

EPS Calculation Scenarios

• EPS using fully equity funding: Calculation based on total profits available to equity shareowners, reflecting potential maximum EPS.
• EPS with mixed funding (50% equity, 50% debentures): Interest expenses reduce taxable income, affecting overall EPS.
• EPS with debentures, preference shares, and equity funding: Further dilution of earnings through fixed costs associated with preference dividends and interest on debentures.

Preference for Case-C Based on EPS

• A particular financing option, Case-C, may yield the highest EPS, indicating a more favorable outcome for shareholders.

A Ltd’s Financing Expansion Scenario

• With a share capital of Rs. 1,00,000 divided into Rs. 10 shares and requiring an additional Rs. 50,000, options may include issuing more shares, taking loans, or other financing routes.

Effect of 40% Tax Rate on Earnings After Tax (EAT)

• The application of a 40% tax rate will significantly decrease EAT, affecting the net income available for distribution as dividends, directly impacting EPS calculations.