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Capital Structure Theories^315

Example 3:

The financial manager of a company has formulated various financial plans to finance

Rs 30,00,000 required to implement various capital budgeting projects:

(i) Either equity capital of Rs 30,00,000 or Rs 15,00,000 108 debentures and Rs

15,00,000 equity;

(ii) Either equity capital of Rs 30,00,000 or 13% preference shares of Rs 10,00,000

and Rs 20,00,000

(iii) Either equity capital of Rs 30,00,00 or 13% preference capital of Rs 10,00,000,

(subject to dividend tax of 10 per cent), Rs 10,00,000 1046 debentures and Rs

10,00,000 equity; and

(iv) Either equity share capital of Rs 20,00,000 and 104b debentures of Rs 10,00,000

or 13% preference capital of Re 10,00,000. 10% debentures of Rs 8,00,000 and

Rs 12,00,000 equity.

You are required to detetmine the indifference point for each financial plan, assuming

35 per cent corporate tax rate and the face value of equity shares, as Rs 100.

Solution

TABLE: Determination of Indifference Point

(i)

 &

- , 

&

-= - -

or



   





- 

= - -

or




%




 = ¥

or 0.65X = 1.3X - Rs 1,95,000

or -0.65X = - Rs 1,95,000

^



=^ %

^ =