 |
| Corporate practice bd |
Debt equity finance, also known as "debt-equity financing," is a concept related to the
capital structure of a company or organization. It involves the combination of debt and
equity to raise funds for various purposes, such as business expansion, working capital, or
investment in new projects. Here's an overview of debt equity finance: Debt Financing: Debt
financing involves raising capital by borrowing money from external sources, such as banks,
financial institutions, or bondholders. This borrowed money needs to be repaid with interest
over a specified period. Debt can take the form of loans, bonds, or other financial
instruments. It is considered a liability on the balance sheet because the company is
obligated to repay the borrowed amount. Equity Financing: Equity financing, on the other
hand, involves raising capital by selling ownership stakes in the company. This is typically
done by issuing shares of stock to investors. Equity investors become shareholders and have
a claim on the company's profits and assets. They do not expect repayment but instead
participate in the company's success through dividends and capital appreciation. Debt-
Equity Mix: Companies often use a combination of debt and equity financing to optimize
their capital structure. The specific mix of debt and equity can vary depending on the
company's financial goals, risk tolerance, and market conditions. The right balance between
debt and equity can help companies maximize their financial resources while managing
their financial risk. Advantages of Debt Financing: Tax Destructibility: Interest on debt is
often tax-deductible, reducing the overall cost of financing. Fixed Payments: Debt provides
predictability in terms of interest and principal repayments. Advantages of Equity Financing:
No Obligations: Equity investors do not require regular interest or principal repayments,
reducing financial pressure. Shared Risk: Equity investors share in the company's risk and
reward, which can be attractive in uncertain situations. Considerations: The choice between
debt and equity financing depends on factors like the company's financial stability, cash
flow, interest rates, market conditions, and the company's long-term goals. It's important to
strike the right balance to ensure financial sustainability and growth. Financial Leverage:
Companies that use a significant amount of debt financing are said to be "leveraged." While
debt can amplify returns in good times, it can also magnify losses during economic
downturns. Hybrid Securities: Some financial instruments, such as convertible bonds or
preferred stock, blur the line between debt and equity financing. Convertible bonds, for
example, start as debt but can be converted into equity shares under certain conditions. In
summary, debt equity finance involves the strategic combination of debt and equity to raise
capital and fund various activities within a company. Companies must carefully assess their
financial situation and objectives to determine the most appropriate mix of debt and equity
financing for their specific needs. Capital marketing finance refers to the financing of long term fund especially from the capital markets composed of equity and bond markets.
Formula
1.No of new share = Fund to be raised / Subscription Price
Or, no of new share = Fund to be raised / no. of rights share
Or, no of new share = Existing share / no. of rights share
Or, no of new share = old share / N
Practical example: 01
For the proposed R & D of the ABC company needs to acquire a fund of Tk. 2500000.The financial manager of the company Mr. Nihal wants to raise the required fund by offering right shares at Tk.100 per share.
Requirement:
(i)How many shares should be issued by the company?
Solution,
We know that,
No of new share = Fund to be raised / Subscription Price
= 2500000/100
= 25000 shares(Ans)
Practical example: 02
You have been furnished with the following information:
Companies outstanding share = Tk.50,00,000
Current market price = TK.75 each
Company wants to raised fund by = Tk.7, 00,00000
Subscription price =Tk.70 each
Requirement:
(i) Number of share needed to required fund?
(ii) How many rights will take to buy one share?
(iii) What is the Ex-right price?
(iv) What is the value of rights?
(v) Value of the rights for a new hare
Solution:
1.Number of share needed to required fund? = Fund to be raised / Subscription Price
= 70000000 /70
=1000000 share
2. How many rights will take to buy one share = old share / new share
= 5000000/1000000
= 5(Ans)
3. Ex-right price of a share(Px) =(Po*N) +SP /N+1
= (75*5) +70/ (5+1)
= 375+70/6
= 445/6
= 74.16(Ans)
4. Value of right with Ex-right (VR) = Po-S /N+1
= 75-70/5+1
= 5/6
= 0.83(ans)
5. Value of right =Po-px
= 75-74.16
= 0.84(Ans)
6. Value of rights for new share = VR*N
= 0.83*5
= 4.15
Practical example: 03
The delta Ltd. Is considering a right offering. Currently they have 350000 shares outstanding at Tk.95 each.75000 new shares will be offered at Tk.55 each.
Requirement:
(i) New market value of the company(V)?
(ii) No of right required to buy a new share
(iii) Value of the right when the share sells right on
(iv) What is the Ex-right price?
Solution:
New market value of the company (V) = (old share*old price) + (new share*new price)
= (350000*Tk.95) +(75000*Tk.55)
= Tk.33250000+Tk.4125000
= Tk.37375000(ans)
2.No. of right = old share / new share
= 3500000/75000
= 4.67(Ans)
3. Value of right with Ex-right (VR) = Po-S /N+1
= 95-55/4.67+1
= 40/5.67
= 7.05(Ans)
4. . Ex-right price of a share(Px) =(Po*N) +SP /N+1
= (95*4.67) +55/ (4.67+1)
= 498.65/5.67
=Tk.87.95 (Ans)
Practical example: 04
The corporate practice bd Ltd. Proposes to make a right issue with a subscription price of Tk.10 each. One new share can be purchased for each two shares held. The company currently has outstanding 100,000 shares at Tk.40 per share.
Requirement:
1.number of new share
2.Amount of new investment
3.Total value of company after right issue
4.Total number of shares after right issue.
5.Share price after the right issue
Solution:
1.No. of new share = old share / N
=100000/02
= 50000 share(Ans)
2. Amount of new investment =New share*SP
= 50000*10 each
= 500000(Ans)
3. Value of the company (V)= (old share*Po) + (new share*Sp)
= (100000*40) +(50000*10)
= 4000000+500000
= 4500000(Ans)
4.Total number of share =(old share+ new share)
= (100000+50000)
= 150000 share(Ans)
5. Market price after new share issue=Value of the firm/Total number of shares
= 4500000/150000
= Tk.30(Ans)
Practical example: 05
WiMAX company ltd will issue 200000 shares of common stock at Tk.40 per share through a privileged subscription the 800000 shares of stock currently outstanding have a rights on market price of tk.50 per share.
Requirement:
1.Compute the no of right required to buy a share of stock at 40.
2. compute the value of stock Ex-rights
Solution:
1.No of right =old share/ new share
= 800000/200000
= 4 rights(Ans)
2.Price of ex-right(Px) = (po*N)+sp/N=1
= (50*4)+4/4+1
= 240/5
= Tk.48 (Ans)
Practical example: 06
The JMI bd Ltd. Proposes to make a right offering. The company currently has outstanding 240000 shares at Tk.80 per share. There will be 60000 new share offered at Tk.60 each.
Requirement:
1.What is the new market value of the company?
2. How many rights needed to purchase one new share
3.Whats is the Ex- right price?
4.Whats is the value of the right?
5.Why might a company have a right offering rather than a general cash offer?
Solution:
1.New market value of the company = (Ns*po)+(Ns*Pn)
= (240000*80) +(60000*60)
= 19200000+3600000
= 22800000(Ans)
2.No of right needed =Old share/new share
= 240000/60000
=4 share(Ans)
3.Px=(po*N) = SP/N=1
= (80*4)+60/4+1
= 380/5
=Tk.76 (Ans)
4.VR = (po=sp)/N=1]
= (80-60)/4+1
= 20/5
= 4 (Ans)
5.Comments:
A right offering usually cost less it protects the proportionate interest of existing shareholders and also protects against under pricing.
Practical example: 07
The JMI bd Ltd. Proposes to make a right offering. The company currently has outstanding 250000 shares at Tk.50 per share. There will be 50000 new share offered at Tk.40 each.
Requirement:
1.What is the new market value of the company?
2. How many rights needed to purchase one new share
3.Whats is the Ex- right price?
4.Whats is the value of the right?
5.Why might a company have a right offering rather than a general cash offer?
Solution:
1.New market value of the company = (Ns*po)+(Ns*Pn)
= (250000*50) +(50000*40)
= 12500000+2000000
= 14500000(Ans)
2.No of right needed =Old share/new share
= 250000/50000
=5share(Ans)
3.Px=(po*N) = SP/N=1
= (50*5)+40/5+1
= 290/6
=Tk.48.33 (Ans)
4.VR =(po=sp)/N=1]
=(50-40)/5+1
=10/6
=1.67 (Ans)
5.Comments:
A company can prefer rights offering than a
general cash offer. Because it is cheaper than general cash offer and maintains
proportional ownership.
Practical example: 08
The stock of the XYZ company is selling for tk.150 per share. T5he company issues rights that allow the holders to subscribe for one additional share of stock at subscription price of tk.125 a share for each nine rights hold.
Requirement:
1.A right when the stock is selling “rights-on”
2. One share of stock when it goes” Ex- right”
Solution:
1.VR =(po=sp)/N=1]
=(150-125)/9+1
=25/10
=2.50 (Ans)
2.Px=(po*N) =SP/N=1
=(150*9)+125/9+1
=1485/10
=Tk.147.50(Ans)
Practical example: 09
Your supplied with following information of ABC LTD.
|
Market price per share |
Tk.120 |
|
Subscription price |
Tk.80 |
|
No. of old share |
10000 share |
|
Fund to be raised |
Tk.400000 |
Requirement:
1. Total value of the firm before issue of right
2. No. of new share
3.value of a right before Ex- right
4.Value of share at ex right
5. Value of right at ex- right
Solution:
1.Total value of the firm before issue of rights=(old share*old price)
= (10000*120)
=1200000(Ans)
2. No. of new share =Fund to be raised/subscription price
= 400000/80
=5000 shares
3.value of a right before Ex- right
VR =(po=sp)/N=1]
=(120-80)/2+1
=40/3
= 13.33 (Ans)
4.Value of share at ex right
Px=(po*N) +SP/N=1
= (120*2) +80/2+1
=320/3
=Tk.106.67 (Ans)
5. Value of right at ex- right =(NS*Po) +(NS*Pn)
= (10000*120) +(5000*80)
= Tk.1600000(Ans)
Practical example: 10
ABC Ltd has 50000 share outstanding and each share is currently selling at Tk40. For the proposed R and D program the company needs to acquire a fund of Tk.500000. the financial manager of the company, MR Hossain wants to raise the required fund by offering right shares at TK.25 per share.
Requirement:
1.No of new share issued to be issued
2.Number of right needed to buy a new share of stock
3.Value of right before Ex-right
Solution:
1.No of new share issued to be issued =Fund to be raised/ subscription price
= 500000/25
=20000 share(Ans)
2.Number of right needed to buy a new share of stock =Old share/ new share
= 50000/20000
=2.50 share(Ans)
3.Value of right before Ex-right = (po-sp)/N+1
= (40-25) /2.50+1
=15/3.50
=4.29(Ans)
Practical example: 11
XYZ company needed to raise Tk.2000000 by offering 200000 right share. The company currently has outstanding 1000000 share at Tk.20 each.
Requirement:
1. What must be the subscription on the right offer?
2.What will be the share price after the right issue?
3.What is the Value of right before Ex-right
4.How many rights would be issued to an investor who currently owns 1000 shares?
Solution:
1.subscription price = fund to be raised/ no. of right
=2000000/200000
=Tk10(Ans)
2.. Market price per share after issue of right Px=(po*N) +SP/N=1
= (20*5) +10/5+1
=110/6
= Tk.18.33 (Ans)
Here, no of right = old share/new share =1000000/200000=Tk.5.00
3. Value of right to buy new share(SP) =(Po-SP)/N+1
=(20-10)/5+1
=10/6
=1.67(Ans)
Value of right for new share=1.67*5=8.333
4.No. of right to the investor who owns 1000 shares
No. of right =1000/5 =Tk.200 shares
Practical example: 12
The ABC company ltd own five share of ACI LTD. Common stock. The market value of stock is Tk.70.ABC also have to Tk.58 cash, He has Just received word of rights offering. One new share of stock can be purchased at Tk58 for each 5 share currently owned (base on 5 rights).
Required:
(i) What is the value of right?
(ii) What is the value of share after right per share issued?
(iii) What is the value of ABC portfolio before the right offering?
(iv) What is the value of ABC portfolio if the participle in the right offering?
Solution
(i)Value of Right (VR) =(po=sp)/N+1
= (70-58)/5+1
=12/6=2(Ans)
(ii) Value of after Right (Px) = (po*N) =SP/N+1
= (70*5) +58/5+1
= 408/6
=Tk.68 (Ans)
(iii)What is the value of ABC portfolio before the right offering = (NS*Po) +Cash
= (5*70) +58
=350+58
= Tk.408(Ans)
(iV) value of ABC portfolio if the participle in the right offering=(PX*NS1)
=68*6
Tk. 408(Ans)
Here NS1= No of old share +no. of share from right offering=5+1=6
“The End”