Calculate the EPS

A company needs Rs 10 lac in new, long-term financing. The firm is considering the issue of shares or convertibles. The current market price of the stock is Rs 20. The new issue could be sold for Rs 19. An alternative would be to issue 11 percent, Rs 1,000 face value convertible at a conversion price of Rs 25 per share. The company currently has 2 lac shares outstanding; current profit after tax is Rs 4 lac.

Calculate the EPS for the two alternatives before and after conversion assuming that earnings remain the same.

A fuel injection company has four investments:

a. A project to implement ERP software in the company.

b. A proposal to start a software subsidiary

c. Repairing an old assembly line.

d. A proposal to manufacture spark plugs.

Classify them as cost reducing, revenue expanding (related business) and revenue expanding (unrelated business).

Solution: