CHAPTER 7 BONDS AND THEIR VALUATIONWELCOME TO
Problems on
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Copyright © by R.S.Pradhan All rights reserved.
Self-test Problems (page 294): SP 1, 2, 9 & 11 SP-1: Suggested solution
(a)
SP-1: (b)
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[(50,000 – (-75,000)]/-75,000
DOL125,000 =------------------------------------ = -8.3
(150,000-125,000)/125,000
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(175,000-50,000)/50,000
DOL150,000 = --------------------------------------- = 15x
(175,000 – 150,000)/150,000
If the firm is operating at ........... units, a 1% increase in quantity sold will produce ........?% increase in profits.
(225,000-175,000)/175,000
DOL175,000 = --------------------------------------- = 5x
(185,000 – 175,000)/175,000
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SP-2: (a)
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(c) Cash BEP
Q* =-------------------------- = ---------------------- =---------
S* = 2600 x Rs.45 = Rs.117,000
(d) 4,000 (Rs.45 - Rs.20) = Rs.100,000. It is short of covering all fixed charges, i.e., 110,000. But it can cover more than cash fixed charges of Rs.65,000. The margin is wide.
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SP-9:
CSC: Same except 2000 shares, Rs.2500 interest.
Tax = 50%, Sales $80,000 i.e., $80,000/$2
= 40,000 units.
(a) DOL=?
DOL =--------- = ----------------------------------- =3.5
S-V-F 80,000-52,000-20,000
If sales increase by 10%, operating profit will increase by 35%. DOL is the same for both firms.
(b) DFL=?
(b) DFL=? MSC CSC
28,000 28,000
EBIT 8,000 8,000
CSC: 8000/(8000-2500) = 1.45x
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(c) DTL=?
DTL MSC=------------ = -----------------------------------
S-V-F-I 80,000-52,000-20,000-0
=28000/8000 = 3.5
10% increase in sales leads to 10x3.5 =35% increase in earnings available to common stock holders, or EPS.
CSC: S-V 80,000 – 52,000
DTL CSC=------------ = -----------------------------------
S-V-F-I 80,000-52,000-20,000-2500
=28000/5500 = 5.0
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SP-11:
Plans to raise $4,000,000
Plan B: 50% bonds @8%
Plan C: 100% bonds @ 10%
Tax= 50%
Plan A:100% common stock
EBIT $1000,000 $2000,000
No. of old shares 100,000 100,000
New shares $4m/$50 80,000 80,000
Total shares 180,000 180,000
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Plan C: 100% bonds: $4m at 10% interest
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Chart: Plan A Plan B Plan C
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EBIT* - FA EBIT* - FB
EBIT* - FA EBIT* - FC
EBIT* - FB EBIT* - FC
Quiz
Case:
Each member must give the presentation.
Thanking you
B
)Q* =
F
U
NITS
Particular 5,000 units 12,000 units
Income Rs.225,000 Rs.540,000
50% bonds
EBT 360,000 1,360,000
No. of shares Old100,000 100,000
New40,000 40,000
Total140,000 140,000
No. of sharesOld100,000 100,000
EPS
Indiff pt A & C = 1.38million
0.511.52EBIT
EBIT* -480,000 =EBIT* -640,000
180,000 EBIT* - (180,000 x 640,000) = 140,000 EBIT* -(140,000 x 480,000)
40,000 EBIT* -(115,200) =(67,200)
40,000 EBIT*=(67,200) +115,200
180,000 EBIT* - (180,000 x 640,000) = 140,000 EBIT* -(140,000 x 480,000)
80,000 EBIT* -(158,400) =(48,000)
80,000 EBIT*=(48,000) +158,400
180,000 EBIT* - (180,000 x 640,000) = 140,000 EBIT* -(140,000 x 480,000)
40,000 EBIT* -(123,200) =(64,000)
40,000 EBIT*=(64,000) +123,200