capital structure
DESCRIPTION
guide to EBITTRANSCRIPT
Capital structure
The term capital structure is used to represent the proportionate relationship
between debt preference and equity shares on a firms balance sheet
EBIT-EPS approach
• The EBIT-EPS approach is one method available to managers to guide them in making decisions about capital structure
• This approach helpful to analyze the impact of debt on earning per share
Drawbacks
• The EBIT-EPS approach places heavy emphasis on maximizing earnings per share rather than controlling costs and limiting risk
Calculation of EBIT
particulars amountsales xxx
variable cost xxcontribution xxxx
fixed cost xx
EBIT(earning before interest and taxes) xxxx
Particular AmountEBIT Xxxx(-) interest Xx= EBT Xxxx(-) Tax Xx= Earning for ESH XxxxDivided by no. of E.S
Xxx
EPS (Earning Per Share)
xxxx
Calculation of EPS
Q: The present capital structure of Gupta Co. ltd. is:4000, 5% Debentures of Rs 100 each Rs 4,00,0002000, 8% P. Shares of Rs 100 each Rs 2,00,0004000, Equity shares of Rs 100 each Rs 4,00,000
Rs 10,00,00010,00,000The present earning of the company before interest & taxes are 10% of the invested capital every year. The company is in need of Rs 2,00,000 for purchasing a new equipment and it is estimated that additional investment will also produce 10% earning before interest & taxes every year.The company has asked your advice as to whether the requisite amount be obtained in the form of 5% Debenture or 8% P. SharesOr equity shares of Rs 100 each to be issued at par. Examine the problem in all its bearing and advice firm if the Corporate tax rate is 50%.
Example
ParticularsPresent
iDebenture
iiP. Share
iiiEq. Share
EBIT(-)Interest
1,00,00020,000
1,20,00030,000
1,20,00020,000
1,20,00020,000
EBT(-)Tax 50%
80,00040,000
90,00045,000
1,00,00050,000
1,00,00050,000
EAT(-)P. Dividend
40,00016,000
45,00016,000
50,00032,000
50,00016,000
ESH(÷) No. of Equity Shares
24,0004,000
29,0004,000
18,0004,000
34,0006,000
EPSChange in EPS
Rs 6.00-
Rs 7.25+1.25
Rs 4.50-1.50
Rs 5.67-0.33
Tabulated structure
BREAKEVEN EBITEPS
EBIT$1m $2m $3m $4m
Debt + Equityalternative
EquityAlternative
0
3
2
1
Indifference point
Equity Advantages
Debt Advantages
Conclusion
• If expected EBIT > EBIT at indifference point debt financing is beneficial
• If expected EBIT < EBIT at indifference point equity financing is beneficial
Debt Financing
Equity Financing
Residual dividend
• The dividend payments are made from the equity that remains after all the project capital needs are met. This equity is also known as residual equity
• If a certain amount of money is left after all forms of business expenses then the corporate houses distribute that money among its shareholders as dividends.
• Companies that follow a residual dividend policy only when other satisfactory opportunities and sources of investment of funds are not available.
Stable dividend policy
It is the policy in which dividend given is fixed ,stable or consistently given at a regular interval of time.
Benefits
1. Confidence Among Shareholders.
2. Income Conscious Investors.
3. Stability in Market Price of Shares.
4. Encouragement to Institutional Investors.
Dividend policy VS Bonus shares
• The policy a company uses to decide how much it will pay out to shareholders in dividends
• It does not increase the number of share with the share holder
• Bonus shares are shares given to existing stockholders in proportion to the number of shares they hold.
• The total number of share gets increased.
Dividend Policy Bonus shares
• The policy a company uses to decide how much it will pay out to shareholders in dividends.
• It means repurchasing its own share in the market out of the profit generated
Buy back of shareDividend Policy
surplus earnings are distributed to share holders in the form of cash dividends or to repurchase the company's stock
Dividend Policy V/S buy back of share
Bonus shares are shares given to existing stockholders in
proportion to the number of shares they hold.
the EPS would reduce as the equity capital has gone up
Bonus shares are issued from the free reserves of the
company
Stock splits are mainly carried out with the intention of
increasing liquidity
new investors might like to buy the stock as it is available at a
lower price
stock-split is a division of a share into shares with lower face
value.
Bonus shares V/S stock split