- August 15, 2021 at 11:19 am #631614fizaaliMember
- Topics: 50
- Replies: 36
Hello Sir, hope you are doing well.
1) To see whether the Debt Finance or Equity Finance is beneficial to be undertaken in an exam question what ratios we can calculate in order to identify whether this step of raising finance would lead to increase in shareholder’s wealth before & after the financing decision? Can we calculate any ratio that can tell the share price such as DVM or PE ratio or EPS; or do we have to use ratios only that is being asked?
2) To see the debt finance would be beneficial or not we calculate PE & EPS ratios because both of these ratios are affected by the interest paid during the year.
3) To see the equity finance would be beneficial or not we calculate PE & TERP steps because both of them are affected by the new shares being issued.
Thanks in advance for your time 🙂August 15, 2021 at 12:28 pm #631639John MoffatKeymaster
- Topics: 57
- Replies: 51561
1. If ratios are specifically asked for then obviously you must provide them. Otherwise you calculate the share price using the information available in the question.
2 and 3. The method of financing is beneficial to shareholders if the value of the shareholding increases. The PE and EPS may be needed to calculate the value of the shares – that depends again on the information given in the question. The TERP is only of any relevance if a rights issue is one of the methods of raising the finance.
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