Untitled-29

(^314) Financial Management
N 1 = number of equity shares outstanding if only equity shares are issued
N 2 = number of equity shares outstanding if both debentures and equity shares
are issued
N 3 = number of equity shares outstanding if both preference and equity shares
are issued
N 4 = number of equity shares outstanding if both preference shares and
debentures are issued
I = the amount of interest on debentures
P = the amount of dividend on preference shares
t = corporate income tax rate
Dt = tax on preferance dividend
For a New Company The indifference point can be determined by using the following
equations:
(i) Equity shares versus debentures:
 &
  
&
-= - -
(a)
(ii) Equity shares versus preference shares:
 &

  

&

  - - -

=

-

(b)

(iii) Equity shares versus preference

 &

  + 

&

-= - - -

(c)

(iv) Equity shares versus preference shares and debentures:

 &

-   +

&

-= - - -

(d)

For and Existing Company If the debentures are already outstanding, let us assume

i, = interest paid on existing debt, and I2 = interest payable on additional debt, then the

indifference point would be determined by Equation (e)

 

&

- , ,  

&.

--,-= - - -

(e)