Vishal Kulkarni

Pinnacle Capital Variety Of Numericals

1
Flow of Numerical Problems
 EPS and Gearing Ratio Problems
 Basic EPS
 Diluted EPS
 Problem involving preferred shares
 Problems involving convertible debt
 Problems involving stock options
 Problems involving share buyback/split

 Problems of cost of capital, effective yield,

effective annual interest rate
 Problems on Mutual Fund unit NAV
 Problems on corporate restructuring, share
exchange ratios

Vishal Kulkarni Numericals 2

Calculation of Basic EPS
and Gearing Ratios
Gearing Ratio, EPS, Cost of Capital : Problem
1
▪ The capital structure of Thermax India under three different
situations:
▪ Using this information calculate EPS under each situation.
Provide Particulars Situation
your comments. Assume I Situation
Tax Rate of 35%.II Situation
III
EBIT 7,00,000 7,00,000 7,00,000

Capital Structure:

10% Debentures 10,00,000 10,00,000 10,00,000

12% Bank Loan 20,00,000 10,00,000 5,00,000

8% Preference Shares 5,00,000 5,00,000 5,00,000

Equity Shares value (FV 15,00,000 25,00,000 3,00,000

=Rs.10)
Vishal Kulkarni Numericals 4
Gearing Ratio, EPS, Cost of Capital : Solution
1
▪ Note that preferred dividends are paid after tax.
▪ The EPS is observed to be higher wherever the gearing ratios are
higher. Particulars Situation I Situation II Situation
III
EBIT 7,00,000 7,00,000 7,00,000
Debentures Interest (1,00,000 (1,00,000) (1,00,000)
)
Bank Loan Interest (2,40,000 (1,20,000) (60,000)
)
Profit before tax (PBT) 3,60,000 4,80,000 5,40,000
Tax 35% (1,26,000 (1,68,000) (1,89,000)
)
Profit after tax (PAT) 2,34,000 3,12,000 3,51,000
Preference Dividend (8%) 40,000 40,000 40,000
Net Income to shareholders 1,94,000 2,72,000 3,01,000
Equity Shares 1,50,000 2,50,000 30,000
EPS 1.29 1.08 10.3
Gearing ratio (Debt/equity) 7:3 1:1 20:3
Vishal Kulkarni Numericals 5
Gearing Ratio, EPS, Cost of Capital : Problem
2
▪ Calculate the EPS of each company, assuming that PBIT and Tax
are the same for both companies at Rs.40,00,000. Assume
corporate tax at 40%.
Particulars BC Ltd. ZX Ltd.
Equity Capital 20,00,000 (FV =10) (FV =10)
23,50,000
12% Preference Shares 20,00,000

10% Debentures 22,50,000 35,00,000

10% Loan 36,00,000 ---
78,50,000 78,50,000

Vishal Kulkarni Numericals 6

Gearing Ratio, EPS, Cost of Capital :
Solution 2
▪ Note that preferred dividends are paid after tax.
▪ The EPS is observed to be higher wherever the gearing ratios are
higher.
Particulars BC Ltd ZX Ltd
PBIT 40,00,000 40,00,000

Debentures Interest (10%) (2,25,000) (3,50,000)

10% Loan (3,60,000) ----------
PBT 34,15,000 (36,50,000)
Tax 40% (13,66,000) (14,60,000)
PAT 20,49,000 21,90,000
12% Preference Shares --------- (2,40,000)
NI to shareholders 20,49,000 19,50,000
No of shares 2,00,000 2,35,000
EPS 10.245 8.29
Gearing Ratio 2.92 2.34

Vishal Kulkarni Numericals 7

Gearing Ratio, EPS, Cost of Capital :
Problem 3 EPS of each company assuming that PBIT
▪ Calculate the and Tax
is the same for both companies at Rs.32,50,000. Assume
corporate tax at 30%. (FV =Rs10).

Particulars CD limited QP limited

Equity Capital (FV =10) 35,00,000 (FV =10) 55,00,000
12% Preference Shares 30,00,000

10% Debentures 22,50,000

10% Loan 12,50,000 ---
77,50,000 77,50,000

Vishal Kulkarni Numericals 8

Gearing Ratio, EPS, Cost of Capital :
Solution 3
▪ Note that preferred dividends are paid after tax.
▪ The EPS is observed to be higher wherever the gearing ratios are
higher.
Particulars CD limited QP limited
PBIT 32,50,000 32,50,000

Debentures Interest (10%) -------- (2,25,000)

10% Loan (1,25,000) ----------
PBT 31,25,000 30,25,000
Tax 30% (9,37,500) (9,07,500)
PAT 21,87,500 21,17,500
12% Preference Shares (3,60,000) -------
Net income to shareholders 18,27,500 21,17,500
No of shares 3,50,000 5,50,000
EPS 5.22 3.85
Gearing ratio 1.21 0.4091

Vishal Kulkarni Numericals 9

Calculation of Basic EPS
and Diluted EPS
Gearing Ratio, EPS, Cost of Capital :
Problem 4
▪ Venus Technologies Limited started its business on 1 April 2011
and provided the following details as of 31 March 2015: Using
this information, calculate the company's EPS and comment.
▪ The Convertible debentures are converted into 10 Equity Shares
Rs.10 each. (FV =Rs. 10)You are required to calculate the basic
EPS and diluted EPS. The EBIT is Rs. 7,60,000. Tax rate =35%

Particulars Amount
Equity Capital 15,00,000
Reserves and Surplus 7,50,000
6% Redeemable Preference Shares 5,50,000
8% Convertible Debentures of Rs.100 8,00,000
each
7% Loan 4,00,000

Note - ONLY Convertible debentures are converted. No preferred shares are

converted.
Vishal Kulkarni Numericals 11
Gearing Ratio, EPS, Cost of Capital :
Solution 4
▪ Note that preferred dividends are paid after tax.
▪ BASIC EPS = (PAT – Pref Dividend) / outstanding shares
▪ Given that EBIT =7,60,000
 Interest on Convertible Debentures = 8% x 8,00,000=
64,000
 Interest on loan = 7% x 4,00,000= 28,000
▪ Therefore, EBT = 7,60,000 – 64,000 – 28,000 = 6,68,000
▪ PAT = 6,68,000 X (1-0.35) = 4,34,200
▪ Pref Dividend = 0.06 x 5,50,000 = 33,000
▪ BASIC EPS = (4,34,200 – 33,000) / 1,50,000 = 2.67
After convertible shares are converted into shares:
▪ Additional shares created on conversion = 800000/100 *10
=80000
▪ DILUTED EPS = (PAT - Pref dividend + post tax interest saved
due to conversion) / (Original outstanding shares + conversion
Vishal Kulkarni
shares) Numericals 12
Gearing Ratio, EPS, Cost of Capital :
Problem 5
▪ Surbhi Technologies Limited started its business on 1 April 2011
and has provided the following details as of 31st March 2015.
Using this information calculate the EPS of the company and
comment:
▪ The Convertible debentures are converted into 5 Equity Shares,
Rs.20 each. You are required to calculate the EPS before and
diluted EPS post-conversion. The EBIT is Rs. 6,60,000, and the
applicable Tax rate is 30%, with a tax holiday of 5 years allowed
Particulars Amount
to the technology sector.
Equity Capital (FV =Rs.10) 10,00,000
Reserves and Surplus 7,50,000
8% Redeemable Preference Shares 6,50,000
9% Convertible Debentures of Rs.100 7,50,000
each
7% Loan 3,00,000

Vishal Kulkarni Numericals 13

Gearing Ratio, EPS, Cost of Capital :
Solution 5
▪ EBIT = 6,60,000
▪ Interest on debentures = 9% of 7,50,000 = 67,500
▪ Interest on loan = 7% of 3,00,000 = 21,000
▪ Pref Dividend = 8% of 6,50,000 = 52,000
▪ EBT = 6,60,000 – Total Interest = 6,60,000 – 67500 – 21000 =
5,71,500
▪ The tax holiday , so EBT = EAT = 5,71,500 (NI) …. Tax rate = 0%
▪ Basic EPS = (NI – Pref dividend)/no of ordinary shares
= 5,19,500/1,00,00 =5.19
▪ Additional shares from debentures conversion = 7,50,000/20 =
37,500
▪ Diluted EPS = (NI – Pref Dividend + Post Tax Interest on
account of converted debentures )/No of ordinary shares
▪ Diluted EPS = (571500 – 52000 + 67500(1-Tax))/(100000+
37500) = 4.26
Note that tax rate is zero.
Vishal Kulkarni Numericals 14
Gearing Ratio, EPS, Cost of Capital :
Problem 6 gives you the Balance Sheet as on 31 Ma. 2020.
▪ Elkay Limited
▪ The company decided to redeem 75% of the Preference Shares
on the date of the Balance Sheet by issuing new Equity Shares.
Does this decision impact the EPS of the Company?
▪ Calculate the EPS before and Diluted EPS and Comment. The
company's EBIT is Rs.23,75,000, and the tax rate is 35%.

Particulars Amount

Equity Capital 15,00,000

12% Redeemable Preference Shares 30,00,000
10% Debentures 10,00,000
10% Loan 12,50,000

Vishal Kulkarni Numericals 15

Gearing Ratio, EPS, Cost of Capital :
Solution 6 – 0.10*10,00,000- 0.10*12,50,000 = 21,50,000
▪ PBT = 2375000
▪ PAT = 21,50,000 *(1-0.35) = 13,97,500
▪ Outstanding equity shares =15,00,000/10 = 1,50,000
▪ Pref dividend = 12% of 30,00,000 = 3,60,000
▪ BASIC EPS =( PAT – Pref dividend)/Outstanding shares = (13,97,500 –
3,60,000)/ 1,50,000 = 10,37,500/1,50,000 = 6.91
▪ Pref shares redeemed on Balance Sheet date = 75%
▪ Amount of no of shares = 75% x Rs. 30,00,000= Rs. 22,50,000
▪ No of preferred shares converted = Rs. 22,50,000/10= 2,25,000

Vishal Kulkarni Numericals 16

Gearing Ratio, EPS, Cost of Capital :
Solution 6 shares O/S as on B/S date = 25% of Rs. 30 lakhs = Rs.
▪ Amount of pref
7,50,000
▪ No. of preferred shares O/S = Rs. 7,50,000 / 10 = 75,000
▪ Weighted average pref shares outstanding during the year = Rs.
30,00,000*364/365 + Rs. 7,50,000*1/365 = 29,93,835
▪ Pref dividend @ 12% on 29,93,835 pref shares = Rs. 3,59,260
▪ Weighted average ordinary shares outstanding the year
= 1,50,000 *364/365 + 3,75,000*1/365 = 1,50,616
▪ DILUTED EPS = (PAT – Pref Div on 29,93,835)/ Wtd avg no of
ordinary shares = (13,97,500 – 3,59,260)/1,50,616 = 6.89
▪ Conversion has diluted the EPS.

Vishal Kulkarni Numericals 17

Gearing Ratio, EPS, Cost of Capital :
Problem
Company ABC7has the following structure of shares and dilutive
securities at the end of a fiscal year:

▪ Weighted average Common shares outstanding: 800,000

▪ Convertible preferred shares: 10,000, convertible into 5
shares of common stock each and paying a dividend of $10
per share
▪ Convertible Debt: $20,000 of 5% bonds convertible into
5,000 shares
▪ Stock Options outstanding at the beginning of the year:
10,000 with an exercise price of $45 (Average market price
of company shares during the year was $55 per share)
▪ Net Income before preferred dividend=$20,00,000, tax rate
25%.

Vishal Kulkarni Numericals 18

Gearing Ratio, EPS, Cost of Capital :
Solution
▪ BASIC EPS 7
= (PAT – Pref Dividend)/ No. of outstanding ordinary
shares
= (20,00,000 – 10,000 x 10)/8,00,000 =
2.375

▪ ADDITIONAL SHARES
▪ No of additional shares were created due to the conversion of
preference shares = 10,000 X 5 =50,000
▪ No of shares issued due to conversion of convertible debt =
5,000

▪ Computation for stock options and warrants: Shares outstanding

are calculated by an increase for an excess of newly converted
shares over and above the no of “inferred” shares that would
have to be issued at the average market price of the period for
receiving the conversion proceeds. Consider the above example
of company ABC assuming only unexercised stock options are
there
Vishal and other convertibles areNumericals
Kulkarni absent. The computation would 19
 Gearing Ratio, EPS, Cost of Capital :
Solution 7
Increase in shares outstanding

Proceeds from option exercise (10,000*45) $4,50,000

No of shares due to Buyback @$55 per share out of 8,182

above received proceeds (450,000/55 )=8182

Dilutive shares from options = Actual shares – New shares issued

▪ Dilutive shares from options = 10,000 – 8,182

▪ Dilutive shares from options = 1,818 (no of additional shares

created)

Vishal Kulkarni Numericals 20

Gearing Ratio, EPS, Cost of Capital :
Solution 7
▪ Diluted EPS = (NI + interest on convertible debt*(1-t))/

(outstanding shares + additional shares on account of conversion

of pref.shares + no. of additional shares created on account of

conversion of debt + no. of additional shares on account of option

exercise

Diluted EPS = (20,00,000 +20,000*.05*(1-0.25))/

(8,00,000+50,000+5,000+ 1818 )

=2.33

Vishal Kulkarni Numericals 21

Gearing Ratio, EPS, Cost of Capital :
Problem 8
▪ Anne Ltd reported NI =$1,00,000, ordinary shares = 50,000, and
stock options outstanding for the year =3000. Each stock option is
convertible into common shares of $30 each. The company’s
average stock price for the year =$ 40. Calculate basic & diluted
EPS.
Solution:
▪ Basic EPS = NI - Pref dividend/no of common shares
= (1,00,000 -0)/50,000 =2
▪ Diluted EPS = (NI- Pref.div)/(common shares + created shares due to
option exercise)
Net increase due to option exercise:
▪ Receipt of funds on Issue of shares on exercise = 3000*30
=90,000
▪ No of shares equal to $90,000= 90,000/40=2250
▪ Dilutive shares created = 3000-2250=750
▪ Diluted EPS = 1,00,000/(50,000+750) = 1.97
▪ Diluted EPS < basic EPS. Therefore, stock option exercise has a
dilutive effect & included in the
Vishal Kulkarni computation of diluted EPS.
Numericals 22
Gearing Ratio, EPS, Cost of Capital :
Problem 9 basic EPS =42, common shares =1,00,000,
▪ A company's
convertible pref. shares= 1,00,000 (1:1) with FV =10 , pref.
dividend=15%.
Calculate diluted EPS.

Solution:
▪ Basic EPS =42
▪ No of shares = 1,00,000
▪ BASIC EPS = (PAT – Pref Dividend)/No of ordinary shares
▪ PAT = (Basic EPS* No of common shares ) + Pref Dividend
▪ PAT = 42*1,00,000 + 0.15*1,00,000*10 = 42,00,000 + 1,50,000
= 43,50,000
▪ DILUTED EPS =
(PAT)/(no. of common shares + no of shares created
on conversion)
= 43,50,000 /(1,00,000 + 1,00,000) = 21.75
Vishal Kulkarni Numericals 23
Gearing Ratio, EPS, Cost of Capital :
Problem
▪ A company10
issued shares on the following dates of the year:
▪ No of shares issued on 1st January = 10 lakh
▪ No of shares issued on 1st April = 12 lakh
▪ No of shares issued on 1st July = 20 lakh
▪ PAT = Rs.100 cr
(i)Calculate the weighted average no of shares during the year.
(ii) Estimate its EPS

Solution:
Weighted average no of shares during the year

=10*12/12 + 12*9/12 + 20*6/12 = 29

EPS = 100/29 = 3.44

Vishal Kulkarni Numericals 24

Gearing Ratio, EPS, Cost of Capital :
Problem 11
▪ A company issued shares on the following dates of the year:
▪ No of shares issued on 1st January = 15 lakh
▪ No of shares issued on 1st April = 12 lakh
▪ No of shares bought back on 1st July = 20 lakh
▪ No of shares issued on October 1st = 18 lakh
▪ PAT = Rs.120 cr
(i)Calculate the weighted average no of shares during the year.
(ii) Estimate its EPS

Solution:
Weighted average no of shares during the year
=15*12/12 + 12*9/12 - 20*6/12 + 18*3/12= 18.5
EPS = 120/18.5 = 6.48

Vishal Kulkarni Numericals 25

Gearing Ratio, EPS, Cost of Capital :
Problem 12 the following shares in a year:
A company issued
▪ 1st January – no of shares = 10 lakhs issued
▪ 1st April – no of shares = 12 lakhs issued
▪ 1st July – no of shares = 20 lakhs issued
▪ 1st October – no of shares = 12 lakhs bought back
▪ PAT = Rs.100 lakhs
Calculate: (i) Weighted average No of shares (ii) EPS

Solution:
▪ Weighted average no of shares
=10 *12/12 + 12*9/12 +20*6/12 – 12*3/12 = 26

▪ EPS = 100/26 = 3.84

Vishal Kulkarni Numericals 26

 Gearing Ratio, EPS, Cost of Capital :
Problem
Question: 13
Fast Bolts issued shares in the following manner in a year:
● 1st January – no of shares = 10 lakhs issued
● 1st April – no of shares = 12 lakhs issued
● 1st July – no of shares = 20 lakhs issued
● 1st October – no of shares = 12 lakhs bought back
● PAT = Rs.100 lakhs
Calculate: 1. Weighted average number of shares 2. EPS

EPS = PAT / Wt
Solution:
Avg shares

EPS = 100 lakhs /

26 lakhs
= 3.84

Vishal Kulkarni Numericals 27

 Gearing Ratio, EPS, Cost of Capital :
Problem
Question: 14
Fast Bolts issued shares in the following manner in a year:
● 1st January – no of shares = 10 lakhs issued
● 1st April – no of shares = 12 lakhs issued
● 1 June - Bonus shares were issued in the ratio of 1 share issued for 3
shares held on the date.
● 1st July – no of shares = 20 lakhs issued
● 1st October – no of shares = 12 lakhs bought back
● PAT = Rs.100 lakhs
Calculate: 1. Weighted average number of shares 2. EPS

Solution:
■ Whenever there is a bonus issue of shares then shares held
before bonus and shares after bonus are not equal. Shares
before bonus are more worth as compared to shares after
bonus.
■ In this case 3 share before bonus are equivalent to 4 shares
post bonus. This means i will need to adjust the number of
shares held before bonus such that they become equivalent to
post bonus shares.
■ The adjustment we do is to multiply pre bonus shares by 4/3.
Vishal Kulkarni Numericals 28
 Gearing Ratio, EPS, Cost of Capital :
Problem 14
Solution:

EPS = PAT / No of weighted average shares outstanding

= 100 lakhs / 32.333 lakhs
= 3.09

Vishal Kulkarni Numericals 29

 Gearing Ratio, EPS, Cost of Capital :
Problem
Question: 15
Fast Bolts issued shares in the following manner in a year:
● 1st January – no of shares = 10 lakhs issued
● 1st April – no of shares = 12 lakhs issued
● 1 June - Shares were split 1:1. I.e. One share held become 2 shares post
split.
● 1st July – no of shares = 20 lakhs issued
● 1st October – no of shares = 12 lakhs bought back
● PAT = Rs.100 lakhs
Calculate: 1. Weighted average number of shares 2. EPS

Solution:
■ Whenever there is a split of shares then shares held before split
and shares after split are not equal. Shares before split are
more worth as compared to shares after split.
■ In this case 1 share before split is not equivalent to 2 shares
after split. This means i will need to adjust the number of shares
held before split such that they become equivalent to post split
shares.
■ To do this i will double the shares before the split.

Vishal Kulkarni Numericals 30

 Gearing Ratio, EPS, Cost of Capital :
Problem 15
Solution:

EPS = PAT / No of weighted average shares outstanding

= 100 lakhs / 45 lakhs
= 2.222

Vishal Kulkarni Numericals 31

 Gearing Ratio, EPS, Cost of Capital: Mid-
Sem 2024
A company Santosh Itd Issues / Buys Back equity shares during the
year:
Issues on 1st February - 35,000 shares
Issues on 1st June - 25,000 shares
Buys Back on 1s July - 25,000 shares
Issues on 1st November - 20,000 Shares
The company also issues bonus shares in the ratio of two shares for
every five shares held on 1st June. The company has 50,000 (FV =
Rs. 10) outstanding preferred shares during the year. If NI = Rs
25,00,000 then Calculate: (i) Weighted Avg Number of common
shares
(i) Earnings per Share.

Vishal Kulkarni Numericals 32

 Gearing Ratio, EPS, Cost of Capital : Mid-
Sem 2024
Solution 1:

Vishal Kulkarni Numericals 33

 Gearing Ratio, EPS, Cost of Capital : Mid-
Sem 2024
Solution 2:

Vishal Kulkarni Numericals 34

 Gearing Ratio, EPS, Cost of Capital: Mid-
Sem 2024
A Leading pharma company is in the business for decades. It has
the following data:
1. Weighted Average Number of Common Shares : 8,75,000
2. Convertible Preferred Shares: 10,000 convertible into 5
shares of common shares each and paying dividend of Rs 10
per preferred share.
3. Convertible Debt: Rs 20,000 of 5% convertible bonds into
5000 common shares.
If Net Income is Rs 20,00,000 and Tax Rate is 25%.
Calculate (a) Basic EPS (b) Diluted EPS and interpret the results
Solution:
▪ NI = Rs. 20,00,000
▪ Weighted average of equity shares =8,75,000
▪ Pref dividend = 10 x 10,000 = Rs.1,00,000
▪ BASIC EPS =( NI – Pref dividend)/Outstanding shares =
(20,00,000 – 1,00,000)/ 8,75,000 = 19,00,000/8,75,000
= 2.17
Vishal Kulkarni Numericals 35
 Gearing Ratio, EPS, Cost of Capital: Mid-
Sem 2024
Solution:
▪ No. of shares from preferred shares = 5 x 10,000 =
50,000
▪ No. of shares created from convertible debt = 5000
▪ Interest on convertible debt = 5% x 20,000 = Rs. 1,000
▪ Diluted EPS = (NI + Interest on convertible debt ( 1-
Tax)) / (Wtd avg no. common shares + preferred shares
converted + shares from convert debt = (20,00,000 +
1,000 (1-25%) / (8,75,000+50,000 + 5000)
= 20,00,750 / 9,30,000 = 2.1513

Vishal Kulkarni Numericals 36

 Gearing Ratio, EPS, Cost of Capital: Mid-
Sem 2024
There are currently 2 T-Bill's on offer. There is a T-Bill of RBI
issued at Rs 975 Crores for 3 months duration with face
value of Rs 1000 Cr. RBI also offered another T-Bill at Rs 95
Crores for 6 months duration with a face value of 100 Cr.
Calculate and show which investment would be a better
choice for Investment.

Solution:
We will us the following formula for the calculator of yield.

First T Bill yield = (1000-975)/975 x(12/3) x 100 = 10.26%

Second T-Bill = (100-95)/95 x (12/6) X 100 = 10.53%

Second T-Bill is better because of higher yield.
Vishal Kulkarni Numericals 37
Calculation Cost of Capital,
Effective Yield and Effective
Annual Interest Rates
Gearing Ratio, EPS, Cost of Capital :
Problem 16Filipino beer brewer,has arranged a €250 million,
San Miguel, the
five-year, euro-denominated Eurocurrency loan with a syndicate of
banks led by Credit Suisse and Deutsche Bank.
• Up-front syndication fee of 2.0%
• The interest rate is set at LIBOR + 1.75%, with LIBOR reset
every six months.
• An initial LIBOR rate for euros is 5.5%
What is the effective "annual" cost of this loan for the first 6
months?

Solution:
• The net proceeds to San Miguel is: €250 mn - (0.02 * €250 mn) =
€245 mn
• The first semi-annual debt service payment is:
€250 mn * (0.055+0.0175)/2 = €9,062,500
The effective annualized interest rate for the first six months:
(€9,062,500/€245,000.000)
Vishal Kulkarni × 2 = Numericals
0.074 = 7.4% 39
Gearing Ratio, EPS, Cost of Capital :
Problem
Siemens AG, 17
the large German electronics company, is looking to
raise $500 millionfor the next five years. Bank of America and
Deutsche Bank have come up with competing bids for the mandate
to syndicate a $500 million Eurodollar loan for Siemens. Suppose
that six-month LIBOR is currently at 4.35% and the cost of capital is
15%. Their proposals are as follows:

Bank of America Proposal Deutsche Bank Proposal

Principal $ 500mn $ 500mn

Maturity 5 years 5 years

Interest Rate LIBOR + 0.25% LIBOR + 0.375%

Reset Period Six months Six months

Syndication Fee 1.125% 0.75%

Vishal Kulkarni Numericals 40

Gearing Ratio, EPS, Cost of Capital :
Solution 17 Proposal
Bank of America Deutsche Bank Proposal

Net proceeds: Net proceeds:

$500 mn - (0.01125×500 mn) $500 mn - (0.0075×500 mn)
= $494.375 million = $496.25 million

First semiannual debt First semiannual debt

payment: payment:
0.5 × (0.0435 + 0.0025) × 0.5 × (0.0435+0.00375) ×
500 mn 500 mn
= $11,500,000 = $11,812,500

Effective annual interest rate: Effective annual interest rate:

11,500,000/494,375,000 x 2 x 11,812,500/496,250,000 x 2 x
100 =4.6523% 100 =4.761%

Vishal Kulkarni Numericals 41

 Gearing Ratio, EPS, Cost of Capital :
Solution 17
By going with the Bank of America loan proposal, Siemens would pay an additional
syndication fee of $1,875,000 = (0.01125 - 0.0075) x $500,000,000.

In return, Siemens would save interest expense of $312,500 each 6-month for five
years. This annual interest savings is the difference between paying LIBOR + 0.25%
vs. LIBOR + 0.375% (0.00375 - 0.0025)/2 x $500,000,000.

Incremental cash flows by choosing the Bank of America:

31-May- 29-Nov- 31- 29-Nov- 31- 29-Nov- 30- 29-Nov- 31- 29-Nov-
29-Nov-24 25 25 May-26 26 May-27 27 May-28 28 May-29 29

$ $ $ $ $ $ $ $ $ $
$
(1,875,000) 312,500 312,500 312,500 312,500 312,500 312,500 312,500 312,500 312,500 312,500

XIRR 22%

42
Gearing Ratio, EPS, Cost of Capital :
Problem 18
Citibank offers to syndicate a Eurodollar credit for the government of
Poland with the following terms:
Principal: U.S. $1 billion Maturity: 7 years
Interest rate: LIBOR + 1.5%, reset every six months
Syndication fee: 1.75%

Solution:
1. What is the net proceeds to Poland from this syndication loan?
$1,000.000,000 × (1-0.0175) = $982,500,000

2. Assuming that six-month LIBOR is currently at 6.35%, what is

the effective annual interest cost to Poland for the first six
months of this loan?
First 6-month interest payment: $1bn x (0.0635 + 0.015) x 0.5 =
$39.250,000
Effective annual interest rate = ($39.250,000 x 2)/ $982,500.000 =
Vishal Kulkarni
7.9898% Numericals 43
Gearing Ratio, EPS, Cost of Capital :
Problem
IBM wishes to19
raise $1 bn and is trying to decide between a
domestic dollar bond issue and a Eurobond issue. The U.S. bond can
be issued at a coupon of 6.75%, paid semiannually, with
underwriting and other expenses totaling 0.95% of the issue size.
The Eurobond would cost only 0.55% to issue but would bear an
annual coupon of 6.88%. Both issues would mature in 10 years.
Assuming all else equal, which is the least expensive issue for IBM?

Solution:
❏ U.S.bond:
Cash flows today = $ I bn x (1-0.0095) = $990,500,000
Semi-annual interest = $ I bn x 0.0675 / 2 = $33,750,000

Vishal Kulkarni Numericals 44

 Gearing Ratio, EPS, Cost of Capital :
Problem
Solving 19 problem we get r = 3.4415%
the above
But this is semiannual rate. So annual yield = (1 + 3.4415%) ^2 - 1
= 7.0014%

❏ Eurobond:
Cash flows today = $ I bn x (1-0.0055) = $994,500,000
Annual interest = $ I bn x 0.0688 = $68,800,000

r = YTM = 6.96% …. As the coupon is annual.

Vishal Kulkarni Numericals 45

Gearing Ratio, EPS, Cost of Capital :
Problem
There 20 on offer. There is a CD issued by PNB at Rs
are 2 CD’s
930 Crores for 7 months duration with face value of Rs 1000
Cr. On the same time, SVC Bank also offered another CD at Rs
92 Crores for 9 months duration with a face value of 100 Cr.
Calculate and show which investment would be a better
choice for Investment.

Solution:

Vishal Kulkarni Numericals 46

Gearing Ratio, EPS, Cost of Capital :
Problem 20

Solution:

Vishal Kulkarni Numericals 47

Calculation Mutual
Fund Unit NAV
 Gearing Ratio, EPS, Cost of Capital :
Problem
Sunny 21 is an open-ended equity scheme that invests
Mutual Fund
in a diversified portfolio of Indian stocks. The fund has the
following assets and liabilities as of March 31, 2023:
Assets:
1. Equity shares:
- Reliance Industries Ltd. - 50,000 shares @ Rs. 2,500 per
share
- Infosys Ltd. - 30,000 shares @ Rs. 1,800 per share
- HDFC Bank Ltd. - 20,000 shares @ Rs. 2,200 per share
2. Debt securities:
- 8.5% Government of India bond - Rs. 10,00,000 (face
value)
3. Cash and bank balances: Rs. 5,00,000
4. Accrued income: Rs. 2,00,000

Vishal Kulkarni Numericals 49

 Gearing Ratio, EPS, Cost of Capital :
Problem 21
Liabilities:
1. Expenses accrued: Rs. 1,50,000
2. Dividend declared but not paid: Rs. 3,00,000
The mutual fund has 1,00,00,000 units outstanding. Calculate the
Net Asset Value (NAV) of the mutual fund as of March 31, 2023.

Assumptions:
- The market value of the equity shares is the same as the
cost price.
- The debt securities are valued at their face value.
- The cash and bank balances are valued at their book value.

Vishal Kulkarni Numericals 50

 Gearing Ratio, EPS, Cost of Capital :
Problem 21
Solution:
Step 1: Calculate the total value of assets:
Equity shares:
Reliance Industries Ltd. - 50,000 shares @ Rs. 2,500 per
share = Rs. 12,50,00,000
Infosys Ltd. - 30,000 shares @ Rs. 1,800 per share = Rs.
5,40,00,000
HDFC Bank Ltd. - 20,000 shares @ Rs. 2,200 per share = Rs.
4,40,00,000
Total equity value = Rs. 22,30,00,000

Debt securities:
8.5% Government of India bond - Rs. 10,00,000 (face value)

Vishal Kulkarni Numericals 51

 Gearing Ratio, EPS, Cost of Capital :
CashProblem 21 Rs. 5,00,000 , Accrued income: Rs. 2,00,000
and bank balances:
Total assets = Rs. 22,30,00,000 + Rs. 10,00,000 + Rs. 5,00,000 + Rs.
2,00,000 = Rs. 22,47,00,000

Step 2: Calculate the total value of liabilities:

Expenses accrued: Rs. 1,50,000
Dividend declared but not paid: Rs. 3,00,000
Total liabilities = Rs. 1,50,000 + Rs. 3,00,000 = Rs. 4,50,000

Step 3: Calculate the Net Asset Value (NAV):

NAV = (Total assets - Total liabilities) / Total number of units
= (Rs. 22,47,00,000 - Rs. 4,50,000) / 1,00,00,000
= Rs. 22,42,50,000 / 1,00,00,000 = Rs. 224.25

Therefore, the Net Asset Value (NAV) of the Sunny Mutual Fund as of
March 31, 2023, is Rs. 224.25 per unit.
Vishal Kulkarni Numericals 52
 Gearing Ratio, EPS, Cost of Capital :
Problem
Calculate the NAV22
of this Mutual Fund given the following information:
1. Value of stocks: Rs. 250 crores, Value of money market instruments: Rs.
8 crores, dividends accrued but not received: Rs. 3.21 crore, Amount
receivable on sale of shares: Rs. 2.51 crore.
2. The amount payable on the purchase of shares is 7.2 crore, and the Fees
payable are Rs. 1.21 crore. No. of outstanding units: 3.21 crore

Vishal Kulkarni Numericals 53

 Numericals on Corporate
Restructuring, Acquisitions,
and Mergers Related
Exchange Ratios
 Gearing Ratio, EPS, Cost of Capital:
Problem 1
XYZ intends to acquire LMN by merger and the following information is available
in respect to the companies:

Particulars XYZ LMN

No. of equity shares 10,00,000 6,00,000

PAT 50,00,000 18,00,000

Market value per share 42 28

Calculate:

 What is the EPS of both companies?

 If the proposed merger takes place. What would be the new earnings per
share for XYZ? Assume that the merger takes place by exchange of equity
shares and the exchange ratio based on the current market price.
 What should be the exchange ratio if LMN ensures that earnings to the
member are as before the merger?

Vishal Kulkarni Numericals 55

 Gearing Ratio, EPS, Cost of Capital:
Problem
Solution : 1
 XYZ will acquire the company of LMN: Pre-merger EPS of both the companies
 EPS of XYZ = 50,00,000 / 10,00,000 = Rs.5
 EPS of LMN = 18,00,000 / 600000 = Rs. 3

Exchange Ratio (Market Price based)= Exchange Ratio

=

This means one share of LMN is equivalent to a 2/3 share (0.67 share) of XYZ.
Obvious, isn’t it? The higher EPS share is more valuable…

 XYZ will issue 600000*0.67= 402000 shares of XYZ to replace LMN shares:

 New outstanding shares of XYZ= 1000000 + (600000*0.67) = 1402000

 New Earnings of XYZ (LMN is added to XYZ) = 50 +18 = 68 lacs
 New EPS= EPS/ XYZ total shares= 68 lacs / 1402000= Rs. 4.86

Vishal Kulkarni Numericals 56

 Corporate Restructuring: Problem 1
Solution:
Option 2:
Option 1:
Let’s assume new shares to be issued
If EPS is to be maintained at 5: are x.
Need to maintain the EPS = Rs. 5
The Exchange ratio will terms of EPS = So,
3/5 = 0.6 =5

That means one share of LMN is

equivalent to a 0.6 share of XYZ. 10,00,000 + x = 68,00,000/5
10,00,000+x=13,60,000
Combined entity earnings = 68 lacs x=3,60,000 i.e new shares to be issued

New shares =10lacs+(600000*.6) So for the 6 lacs of LMN share 3.6 lacs
=13.6 lacs of XYZ shares will be issued.
Check:-
Exchange ratio = =0.6
New EPS = 68 lacs / New shares =
= 68 lacs / 13.6 lacs = Rs. 5

Vishal Kulkarni Numericals 57

 Corporate Restructuring: Problem 2
Ratan India acquiring K N Agro. The exchange ratio is based on the market price
of both companies.

Particular KN Agro Ratan India

Earnings 700000 1000000
Equity Shares 200000 400000
EPS 3.5 2.5
P/E ratio 10 14
Market Price 35 35

Question:
 What will be the EPS after the merger, if. The acquisition happens based on
the current market price?
 What is the change in EPS of both companies based on question 1 above?
Which company shareholders gain and which company shareholders lose?
 Determine the market value of post-merger if the P/E of the acquirer is
maintained. In this case , what will be the value of the acquirer and target
shareholders?
Vishal Kulkarni Numericals 58
 Corporate Restructuring: Problem 2
Solution:

As the market price of the shares is the same exchange ratio will be:

 Exchange Ratio =

 Post Merger EPS = =

Change is the EPS:

 Pre-merger EPS of KN Agri= 3.5
 Pre-merger EPS of Ratan India=2.5

 Now, post-merger EPS is 2.83 for both

 KNA EPS has reduced by 0.67. KN Agro shareholders have lost value.

 Ratan EPS has increased by 0.33. Ratan shareholders have gained.

Value.

Vishal Kulkarni Numericals 59

 Corporate Restructuring: Problem 2
Solution:
We need to maintain the P/E ratio of the acquirer Ratan India.

P/E of Ratan India pre-merger = 14 = P/E of Ratan India post-merger

= 14

= 14 x 2.83 = 39.62 per share

Now post merger value of both the type of shareholders:

Value of Ratan India shareholders= 4 lacs x 39.62 = Rs. 158.48 lacs
Value of KN Agro shareholders = Rs. 2 lacs x 29.62 = Rs. 79.24 lacs

Vishal Kulkarni Numericals 60

 Corporate Restructuring: Problem 3
Question: Company X is contemplating purchasing Company Y. Company X
has 3,00,000 shares with a market price of Rs. 30 per share while Company
Y has 2,00,000 shares selling at Rs. 20 per share. The EPS is Rs. 4 and Rs.
2.25 for X and Y respectively.
Management of both companies is discussing a proposal for the exchange
of shares in proportion to the relative earnings per share of the two
companies. Calculate EPS after the merger if implemented.

Solution:

Company X Company Y
EPS 4 2.25
No shares 300,000 200,000
NPAT 12,00,000 4,50,000

Vishal Kulkarni Numericals 61

 Corporate Restructuring: Problem 3

Vishal Kulkarni Numericals 62

 Corporate Restructuring: Problem 4
Question:
XYZ Ltd. is planning to acquire PQR Ltd. Since the XYZ Company's
current EPS is Rs. 5, the management is keen to get an EPS of Rs. 6
at least post-merger. They seek your advice on the possible exchange
ratio that would give the merged entity an EPS of Rs. 6. It is also
provided that the acquisition would result in a synergy of 300 lakh. The
following financial data is given.

Particulars XYZ Ltd. PQR Ltd.

EPS Rs. 5 Rs. 4
No. of shares 200 Lakhs 80 Lakh
Market Price Rs. 100 Rs. 70.

Vishal Kulkarni Numericals 63

 Corporate Restructuring: Problem 4

Solution - Given:

Required ESP of combined entity = 6

We know that EPS =

So 6=

200 + x = 1620 / 6 = 270

x = 270 – 200 = 70
XYZ needs to issue 70 lacs shares to acquire 80 lacs shares of PQR.
So exchange ratio is = = 0.8750 share of XYZ for 1 share of PQR.

Vishal Kulkarni Numericals 64

 Corporate Restructuring: Problem 5
Question: A Ltd. is studying the possible acquisition of B Ltd. through a merger.
The following data are available:

Firm After-tax No. of equity shares Market price per

earnings share
A Ltd. 10,00,000 2,00,000 75
B Ltd. 3,00,000 50,000 60
(i) If the merger goes through by exchange of equity shares and the
exchange ratio is set according to the current market prices, what
is the new earnings per share for A Ltd.?
(ii) B Ltd. wants to ensure the merger does not diminish its earnings
per share. What exchange ratio is relevant to achieve the
objective?

Vishal Kulkarni Numericals 65

 Corporate Restructuring: Problem 5
Solution: Given
Now, Exchange Ratio (Market Price
based)= Exchange Ratio
=

(1) This means – A will issue 0.8 shares (of A) for 1 share of B. so
total shares to be issued for 50,000 shares of B = 50,000 x 0.80 =
40,000
So total shares outstanding of A after the merger=
2,00,000+40,000 = 2,40,000
So post merger EPS of A = EPS =
EPS = = 5.42

Vishal Kulkarni Numericals 66

 Corporate Restructuring: Problem 5
Solution: Given

Required ESP of combined entity = 6

We know that EPS =

So 6=

2,00,000 + x = 13,00,000 / 6 = 2,16,667

x = 2,16,667 – 2,00,000 = 16,667
A needs to issue 16,667 shares to acquire 50,000 shares of B.
So exchange ratio is = = 0.33334 share of A for 1 share of B.

Vishal Kulkarni Numericals 67

 Corporate Restructuring: Problem 6
Question:
B Ltd. wishes to expand by acquiring other firms. Its expected high growth in
earnings and dividends is reflected in its PE ratio of 17. The Board of
Directors of B Ltd. has been advised that if it were to take over firms with a
lower PE ratio than its own, using a share-for-share exchange, then it could
increase its reported earnings per share.
C Ltd. has been suggested as a possible target for a takeover, which has a
PE ratio of 10 and 1,00,000 shares in issue with a share price of Rs. 15. B
Ltd. has 5,00,000 shares in issue with a share price of Rs. 12.
Calculate the change in earnings per share of B Ltd. if it acquires the whole
of C Ltd. by issuing shares at its market price of Rs. 12. Assume the price of
B Ltd. shares remains constant.

Vishal Kulkarni Numericals 68

 Corporate Restructuring: Problem 6
Solution: Given

B wants to acquire C by issuing its own shares at the market price of Rs. 12.
Exchange Ratio (Market Price based)= Exchange Ratio
=
Therefor B has to issue 1.25 shares of B for each share of C. So total new shares
to be issued by B = 1.25 x 100,000= 125,000

Vishal Kulkarni Numericals 69

 Corporate Restructuring: Problem 7
Question: MK Ltd. is considering acquiring NN Ltd. The following information
is available:
Earning after No. of Equity Market Value
Company Tax Per Share
Shares
MK Ltd. 60,00,000 12,00,000 200
NN Ltd. 18,00,000 3,00,000 160

Exchange of equity shares for acquisition is based on current

market value as above. There is no synergy advantage available.
(i) Find the earning per share for company MK Ltd. after merger, and
(ii) Find the exchange ratio so that shareholders of NN Ltd. would not be at a
loss of their pre-merger EPS.

Vishal Kulkarni Numericals 70

 Corporate Restructuring: Problem 7
Solution: Given

(1) Exchange Ratio (Market Price based)= Exchange Ratio

= ……….
This means - 0.8 share of MK for 1 share of NN

Therefore new shares issued by MK to acquire NN = 0.8 x 300,000 = 240,000

Vishal Kulkarni Numericals 71

Corporate Restructuring: Problem 7
(2) We need to find an exchange ratio so that shareholders of NN Ltd. would
not be at a loss of their pre-merger EPS.

NN’s pre-merger EPS = = = 6

Now, we know that post-merger EPS =

So 6=

12,00,000 + x = 78,00,000 / 6 = 13,00,000

x = 13,00,000 – 12,00,000 = 100,000
MK needs to issue 100,000 shares to acquire 300,000 shares of NN.
So exchange ratio is = = 0.33334 share of MK for 1 share of NN.

72
 Corporate Restructuring: Problem 8
Question: A Ltd. wants to acquire T Ltd. and has offered a swap
ratio of 1:2 (0.5 shares for every one share of T Ltd.).
Calculate:
1) The number of equity shares to be issued by A Ltd. To acquire T Ltd.
2) What is the EPS of A Ltd. after the acquisition?
3) Determine the equivalent earnings per share of T Ltd.
4) What is the expected market price per share of A Ltd. after the
acquisition, assuming its PE multiple remains unchanged?
5) Determine the market value of the merged firm.

Vishal Kulkarni Numericals 73

 Corporate Restructuring: Problem 8
Solution:
(1) Number of equity shares to be issued by A Ltd. To acquire T Ltd.=
0.5 x 180,000 = 90,000 shares of A Ltd. Total shares outstanding post
acquisition= 600,000 + 90,000 = 690,000
(2)Post - acquisition EPS of A ltd. =
= = 3.13 Rs/share
(3) The equivalent earnings per share of T Ltd.:
As T Ltd shareholders received 0.5 shares in place of their one share, the
EPS of T Ltd shareholders is = 0.5 x 3.13 = 1.565 Rs. / share
(4)

Vishal Kulkarni Numericals 74

 Corporate Restructuring: Problem 3
Alexa Corp. provided the following information for the year ended 31st March
2025.
Liabilities Amount (Rs.) Assets Amount (Rs.)
25000 shares of Rs. 10
2,50,000 Premises 1,70,000
each
Creditors 50,000 Freehold Property 20,000
9% Pref Shares of rs. 100
1,20,000 Machinery 75,000
each
Secured Loan 3,000 Stock 25,000
Bank Overdraft
500 Debtors 35,000
(unsecured)
Cash 500
Miscellaneous Expenses
98,000
/ Fictitious Assets
Total 4,23,500 Total 4,23,5000

Vishal Kulkarni Numericals 75

 Corporate Restructuring: Problem 3
Question:

Under the proposed restructuring, the following changes were agreed to the
balance sheet:
 Equity shares are to be reduced to Rs. 2 each
 Preference shares to be reduced by Rs. 40 each
 The secured loan was fully settled by paying Rs. 2,500
 Assets were revalued as under:
 Freehold property Rs. 50,000
 Machinery Rs. 1,00,000
 Stock Rs. 20,000
 Debtors Rs. 30,000
 Premises Rs. 2,70,000
 Reconstruction Expenses paid Rs. 5,000
 All Fictitious Assets are to be written off

Vishal Kulkarni Numericals 76

 IR_ Basic Rules for Journal Entries

If Profit Capital Reduction A/c Credit

If loss Capital Reduction A/c Debit
If value of Asset increases Capital Reduction Credit
If Value of Asset decreases capital Reduction Debit
If creditors settled/ secured loan paid/ expenses paid/ reconstruction paid then Bank
A/c will be Cr. Cash will go out so Bank a/c will be credited.
If sold Bank a/c will be Dr.

Vishal Kulkarni Numericals 77

 Journal Entries
1. Reduction in Share Capital To Asset Ac
Equity share capital A/c….. Dr
To Equity Share Capital 5. Reconstruction Expenses Paid and Pref
To Capital Reduction A/c Dividend paid
Capital Reduction Ac.. Dr.
2. Debentures Settled To Bank
Debentures A/c…. Dr (If Pref. Dividend waived then no entry as it
To Debentures is contingent liabilities)
To Capital Reduction 6. Transfer of balance of capital Reduction
Capital reduction Ac… Dr.
3. Creditors Settled To Capital reserve
Creditors A/c… Dr
To Bank
To Capital Reduction

4. Asset value appreciated or Depreciate

Assets A/c … Dr
To capital Reduction
Capital Reduction Ac Dr

Vishal Kulkarni Numericals 78

 Solution
Basic Understanding between ES are reduced to/by
1. ES reduced to rs. 2 each from FV of rs. 10
ES Cap A/c Dr 10
To ES Cap 2
To C R A/c 8
2. ES reduced by Rs. 2 each from FV of rs. 10
ES Cap Dr 10
To Es Cap 8
To CR A/c 2
NOTE: By value will be in CR A/c and To value in Cap a/c
3. Secured Loan Rs. 3000
Paying 2500
Profit 500 (CR will be cr)
4. Asset Value increase CR .. Cr
Asset value decrease CR … Dr.
5. CR balance which can be transferred to Capital Reserve
CR - credit--- Add
CR… Debit… Less

Vishal Kulkarni Numericals 79

 Narration

Equity Share capital value from 10 to 2

Pref Share cap by 40 from 100
Secured Loan settled/ paid
Being revalued assets
Being reconstruction expenses paid
Being Fictitious asset written off
being balance transferred to Cap reserve

Vishal Kulkarni Numericals 80

 A Ltd provides the following information for the year ended 31 st March 2020:

Liabilities Amt
5000 Shares of rs. 100 each 5,00,000
11% Pref shares of rs. 100 each 6,00,000
9% Debentures of rs. 100 each 8,00,000
Creditors 1,00,000
Total 20,00,000
Assets
Plant and Mach 5,00,000
Motor Vehicle 1,75,000
Stock 25,000
Debtors 5,00,000
Cash 1,00,000
Preliminary Expenses Account 4,00,000
Total 20,00,000
Vishal Kulkarni Numericals 81
 Adjustments
1. Equity shares are reduced from Rs. 100 to Rs. 30 and Pref
Shares by rs. 60 each.
2. 9% Debentures are to be reduced by Rs. 60 each
3. Creditors are settled as under:
20% by 11% Debentures, 40% Cancelled and 40% by Equity Shares
4. Assets revalued as under Plant and Machinery Rs. 5,50,000 and
Motor Vehicles Rs. 1,00,000.
5. Stock was sold at 50% loss
6.All Fictitious Assets are to be written off
7. Pref Dividend was in arrears for 2 years. Half of the dividend
was paid in Cash and remaining was waived.
8. Reconstruction Expenses paid Rs. 10,000.

Vishal Kulkarni Numericals 82

 Solution

Vishal Kulkarni Numericals 83

 Balance Sheet Format as per Schedule VI

Balance Sheet
Schedule VI

Liabilities= Balance Sheet Figure-

Dr+Cr
Assets= Balance Sheet Figure+Dr-
Cr

Vishal Kulkarni Numericals 84

 A ltd following information for the year ended 31st March 2020:

Liabilities Rs. Assets Rs.

Equity Shares(FV of Rs. 10,00,000 Goodwill 2,00,000

10)
10% Pref Shares(Rs. 10 5,00,000 Land & Bldg 10,00,000
each)
10% Debentures 2,00,000 Investments 5,00,000

Creditors 2,00,000 Stock 4,00,000

Other Liabilities 7,00,000 P&L Ac 1,00,000

Preliminary Expenses 4,00,000

Total 26,00,000 26,00,000

Vishal Kulkarni Numericals 85

 The scheme of Reconstruction was as follows:
1. Each equity share will be written down from rs. 10 to rs. 6 fully paid.
2. Each 10% Pref shares is to be reduced from to Rs. 10 to Rs. 8. These Pref shares are
to be converted into 12% pref shares of rs. 2 each and remaining into equity shares
of rs. 6 fully paid
3. 10% Debentures agree to waive 20% of their rights
4. Assets were revalued as Land and Building 12,00,000. Stock to be reduced by 20%
5. Creditors dues were settled as 30% immediate payment, 50% paid by issue of 10%
Debentures and balance to be cancelled.
6. All Intangible and Fictitious assets are written off
7. 10,000 Equity shares of Rs. 6 each were issued to Public for cash.

Prepare Capital Reduction Account and Balance Sheet.

Vishal Kulkarni Numericals 86

 Solution

IR Num 5

Vishal Kulkarni Numericals 87

 A Ltd has the following Balance Sheet as on 31st March 2022:

Liabilities Amt Assets Amt

6000, 10% pref shares 6,00,000 Goodwill 2,00,000

of rs. 100 each fully paid

15000 equity shares of 15,00,000 Land and Building 19,50,000

rs. 100

Loans 2,22,000 Plant and Machinery 70,000

Creditors 7,50,000 Stock 4,00,000

Trade Debtors 2,88,000

Bank balance 1,26,000

P&L account 38,000

TotalKulkarni
Vishal 30,72,000 Numericals 30,72,000 88
 Preference Dividend was in arrears rs. 1,20,000. The Board of Directors of the
company decided upon the following scheme of reconstruction, which was
approved by all concerned:
1. Paid up value of equity shares reduced to 50 rs. per share, face value being rs. 100.
2. Pref shares are to be converted into 13% debentures of rs. 100 each with 80% of
dues (including arrears of pref dividend) and for the balance (including dividend
arrears) equity shares of rs. 100 each( rs. 50 paid up) shall be paid.
3. All equity shareholders agree to pay the balance amount , making shares fully paid
up
4. The value of stock reduced by rs. 100,000
5. Land and building shall be written down to rs. 15,50,000
6. Creditors agreed to forego their claims by 10%
7. Loan was fully settled for rs. 2,00,000
8. Goodwill debit balance of P&L account shall be written off
9. Cost of reconstruction rs. 5000 was paid. Above reconstruction was carried out.
Required to do:
a. Pass journal entries in the books of the company
b. Prepare capital reduction account
c. Prepare balance sheet after reduction

Vishal Kulkarni Numericals 89

 Solution

IR Num 6

Vishal Kulkarni Numericals 90

 Vishal
Kulkarni

Vishal Kulkarni Numericals 91