CBSE Class 12-commerce Answered
‘Yiyo Ltd.’ is a company manufacturing textiles. It has a share capital of Rs.60 lakhs. The earning per share in the previous year was Rs.0.50. For diversification, the company requires additional capital of ?40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned a profit of Rs.8 lakhs on capital employed. It paid tax @ 40%.
(a) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly.
(b) Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.
Asked by purnayyap | 23 Apr, 2020, 11:41: AM
Expert Answer
Calculation of Shareholders Gain or Loss on Diversification:
Particulars |
Amount |
EBIT |
8,00,000 |
Less: Interest |
(4,00,000) |
PBT |
4,00,000 |
Less: Tax |
(1,60,000) |
PAT |
2,40,000 |
EPS (2,40,000/6,00,000) |
0.40 per |
Earnings per share have come down from Rs.0.50 per share to Rs.0.40 and therefore, we can see that the shareholders have lost their wealth on diversification.
Factors that favour the issue of debentures by the company are as follows:
- External sources of finance are always cheaper than internal sources of finance.
- Lower the cost of debt higher is the ability to employ debt.
- Raising funds through debt involves low floatation costs.
- Interest paid on debt is tax deductible expenses.
- By rising debt the control of shareholder is not diluted.
- Makes the capital structure flexible.
Answered by Surabhi Gawade | 23 Apr, 2020, 02:58: PM
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