Gearing

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    nesiann
    Participant
    • Topics: 3
    • Replies: 7

    Realm is financed by $5m 10% preference shares, and $5m equity.

    Calculate the return to each provider of finance if Realm’s profits are:
    i. $1m
    ii. $1.3m
    iii. $700,000


    Avatar of Najiya
    Najiya
    Participant
    • Topics: 1
    • Replies: 96

    i) interest on preference shares = 10% * $5m = $0.5m
    profit 1m – interest 0.5m = $0.5 m for equity shareholders.
    Earnings per share
    preference shares – 0.5/5 = $0.10 = 10c
    equity shares – 0.5/5 = 10c

    ii) interest on pref. shares = 10% * $5m = 0.5m
    profit 1.3m – interest 0.5m = 0.8m for equity shareholders.
    EPS
    preference shares – 0.5/5 = $0.10 = 10c
    equity shares – 0.8/5 = 16c

    iii) interest on pref. shares = 10% * $5m = 0.5m = $500,000
    profit $700,000 – interest $500,000 = $200,000 for equity shareholders
    EPS
    preference shares -$500,000/ $5,000,000 = 10c
    equity shares – $200,000 / $5,000,000 = 4c


    Avatar of raj123nair
    raj123nair
    Participant
    • Topics: 2
    • Replies: 76

    I got the same answer.

    Perfect. :)

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