- 15 Marks
FM – FM – L2 – Q35 – Capital structure
Analyze gearing impact on two companies' EPS and financial risk using provided financial data.
Question
The following information is available about Company A and Company B:
| Company A | Company B | |
|---|---|---|
| Capital structure | GH¢ | GH¢ |
| Equity shares of GH¢1 | 10,000 | 10,000 |
| Reserves | 20,000 | 90,000 |
| 10% debt capital | 30,000 | — |
| 60,000 | 100,000 | |
| 100,000 | 100,000 |
| Annual profit | | | | Sales | 80,000 | 80,000 |
| Variable costs | 40,000 | 40,000 |
| Contribution | 40,000 | 40,000 |
| Fixed operating costs | 10,000 | 10,000 |
| Profit before interest and tax | 30,000 | 30,000 |
| Interest costs | 3,000 | — | | Profit | 27,000 | 30,000 |
| Tax (20%) | 5,400 | 6,000 |
| Profit after tax (= earnings after interest and tax) | 21,600 | 24,000 |
Required:
(a) Calculate the earnings per share for Company A and Company B.
(b) Calculate the level of profit before interest and tax at which the earnings per share for Company A will be equal to the earnings per share for Company B.
(c) Comment on the financial risk in Company A and Company B.
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Debt, Earnings per share, Equity, Financial Risk, Gearing, Profit after tax
- Level: Level 2
- Topic: Capital structure
