XYZ Ltd. is a company engaged …
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XYZ Ltd. is a company engaged in production of Perfumes. Presently, it
sells its products through indirect channels of distribution. But, considering the
sudden surge in the demand for Quality Perfumes , the company is now desire
to make website for direct marketing. The financial managers of the company
are planning to use debt in order to take advantage of trading on equity. In order
to finance its expansion plans, it is planning to raise a debt capital of Rs. 80
lakhs through a loan @ 10% from an industrial bank. The present capital base of
the company comprises of Rs. 15 lakh equity shares of Rs. 10 each. The rate of
tax is 30%.In the context of the above case:What are the two conditions
necessary for taking advantage of trading on equity?Assuming the expected rate
of return on investment to be same as it was for the current year i.e. 12% , do
you think the financial managers will be able to meet their goal. Show your
workings clearly.
Posted by Milan Rangani 4 years ago
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