Show the impact of EPS on the shareholders of Simpson Ltd un

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Strategic Financial Management

1. The capital structure of Orient Ltd in book value terms is given below:

TABLE BELOW
Equity shares (30 million shares, Rs. 10 par) Rs.300 million
11% Preference shares (1.5 million shares, Rs.100 par) Rs.150 million
8 % debentures (1.5 million, Rs.100 par) Rs.150 million
Total Rs.600 million

Market price of equity share Rs. 100
Market price of preference share Rs. 90
Market price of debentures Rs. 90

The expected dividend per share is Rs. 4 and the dividend is expected to grow at the rate of 10 percent. Preference shares are redeemable after 10 years and debentures are redeemable after 5 years. Compute the average cost of capital at market value assuming a tax rate of 30 percent. (10 Marks)

2. Ramesh and Suresh have been managing their family business well for the last 5 years. Now the two brothers decide to expand the business and have hired you (merchant banker) to help them with their IPO process to raise funds from the market by offering a 30 percent stake. With your vast experience, you did an excellent job and the IPO was a success. Being a family-managed business, they did not have a dividend policy, but now Ramesh feels they should pay a high dividend and Suresh feels the profits should be retained in the business. The family has approached you for advice. You are required to make a presentation explaining the relevance/irrelevance to the new Board. (10 Marks)

3. Company Simpson is contemplating the purchase of Company Wilson. Managements of both companies have suggested two alternative proposals for exchange of shares as indicated below:

Alternative 1 - In proportion to the earnings per share of two companies
Alternative 2 - 0.5 share of Simpson Ltd for one share of Wilson Ltd
The details of both the companies are given below:
Simpson Ltd Wilson Ltd
No. of shares 3,00,000 2,00,000
Market price per share 30.00 20.00
EPS 4.00 2.25

You are required to:
a. Calculate the total earnings after the merger under both alternatives and the number of shares (5 Marks)

b. Show the impact of EPS on the shareholders of Simpson Ltd under both alternatives (5 Marks)

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[email protected]
+91- 9503094040