# Gearing

This topic contains 2 replies, has 3 voices, and was last updated by  raj123nair 1 year, 10 months ago. This post has been viewed 15 times

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• nesiann
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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

Najiya
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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

raj123nair
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