Dear Sir / Madam,

Pls help me to solve this problem.

Four companies provide incomplete information for capital structure & cost of capital. You are requested to ascertain missing details for each company.

Alba ltd Bebo ltd kundan ltd D ltd

a) Debt ratio equity 40:60 ? 60:40 60:40

b)cost of equity 11% 11% 11% ?

c)cost of debt 7.2% 7.2% ? 7.2%

d)WACC ? 8.72% 8% 8.32%

Another Question:

a) Arun ltd has sales of Rs 1600000with variable cost @ 60% Fixed cost Rs. 240000. Its 10% Debt is Rs 2000000 and Equity is Rs 2000000 in shares of Rs 100. calculate all lverages & EPS

b) The Co proposes to receive capital structure to 12% bond of Rs 1200000 and equity Rs 800000 The fixed expenses reduces to Rs 200000. The sales remains same but variable cost reduces to 50% of sales. calculate all leverages & EPS.

c) Offer your comments on changing position.

Let’s break down the problems you’ve presented step by step, starting with the first part regarding the four companies and their capital structures. We’ll fill in the missing details for each company based on the information provided.

Analyzing Capital Structure and Cost of Capital

To ascertain the missing details for Alba Ltd, Bebo Ltd, Kundan Ltd, and D Ltd, we need to understand the relationships between debt ratios, costs of equity, costs of debt, and the Weighted Average Cost of Capital (WACC).

1. Understanding the Debt Ratio

The debt ratio indicates the proportion of debt used in the capital structure. Here’s what we have:

• Alba Ltd: Debt ratio of 40:60 (Debt:Equity)
• Bebo Ltd: ?
• Kundan Ltd: 60:40
• D Ltd: 60:40

For Bebo Ltd, we can infer that if the other companies have a debt ratio of 60:40, it’s likely that Bebo Ltd also has a similar structure, especially since its WACC is provided. Thus, we can assume a debt ratio of 60:40 for Bebo Ltd as well.

2. Cost of Equity

For the cost of equity, we see that Alba Ltd, Bebo Ltd, and Kundan Ltd all have a cost of equity of 11%. D Ltd is missing this information. Given the similar profiles of the companies, we can also assume that D Ltd has a cost of equity of 11%.

3. Cost of Debt

All companies except Kundan Ltd have a cost of debt of 7.2%. Since Kundan Ltd has a similar debt ratio and WACC, we can also assign it a cost of debt of 7.2%.

4. Calculating WACC

The WACC formula is:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Where:

• E = Market value of equity
• D = Market value of debt
• V = E + D (total market value)
• Re = Cost of equity
• Rd = Cost of debt
• Tc = Corporate tax rate (not provided, so we will assume it is 0 for simplicity)

Using the ratios and costs we have:

• Alba Ltd: WACC = (0.6 * 11%) + (0.4 * 7.2%) = 9.12%
• Bebo Ltd: WACC = 8.72% (given)
• Kundan Ltd: WACC = 8% (given)
• D Ltd: WACC = 8.32% (given)

Now that we have filled in the missing details, we can summarize:

• Alba Ltd: Debt ratio 40:60, Cost of equity 11%, Cost of debt 7.2%, WACC 9.12%
• Bebo Ltd: Debt ratio 60:40, Cost of equity 11%, Cost of debt 7.2%, WACC 8.72%
• Kundan Ltd: Debt ratio 60:40, Cost of equity 11%, Cost of debt 7.2%, WACC 8%
• D Ltd: Debt ratio 60:40, Cost of equity 11%, Cost of debt 7.2%, WACC 8.32%

Examining Arun Ltd's Financials

Now, let’s move on to Arun Ltd. We need to calculate various leverages and the Earnings Per Share (EPS) based on the provided data.

Initial Financials

Given:

• Sales: Rs 1,600,000
• Variable Cost: 60% of Sales = Rs 960,000
• Fixed Cost: Rs 240,000
• Debt: Rs 2,000,000 (10%)
• Equity: Rs 2,000,000 (in shares of Rs 100)

Calculating Contribution Margin

The contribution margin is calculated as:

Contribution Margin = Sales - Variable Costs

Contribution Margin = Rs 1,600,000 - Rs 960,000 = Rs 640,000

Calculating EBIT

EBIT (Earnings Before Interest and Taxes) can be calculated as:

EBIT = Contribution Margin - Fixed Costs

EBIT = Rs 640,000 - Rs 240,000 = Rs 400,000

Calculating Interest Expense

Interest Expense = Debt * Interest Rate = Rs 2,000,000 * 10% = Rs 200,000

Calculating EBT and EPS

EBT (Earnings Before Taxes) is:

EBT = EBIT - Interest Expense

EBT = Rs 400,000 - Rs 200,000 = Rs 200,000

Assuming a tax rate of 30%, Net Income is:

Net Income = EBT * (1 - Tax Rate)

Net Income = Rs 200,000 * (1 - 0.3) = Rs 140,000

EPS is calculated as:

EPS = Net Income / Number of Shares

Number of Shares = Rs 2,000,000 / Rs 100 = 20,000 shares

EPS = Rs 140,000 / 20,000 = Rs 7

Revised Financials After Changes

Now, let’s analyze the proposed changes:

• New Debt: Rs 1,200,000 at 12%
• New Equity: Rs 800,000
• Fixed Expenses: Rs 200,000
• Variable Cost: 50% of Sales = Rs