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Learning Objective:

To develop students’ understanding concerning the concept of financial leverage and its impact on a firm’s returns

 

Learning Outcome:

After attempting this GDB, the students will be able to comprehend the idea that how Return on Equity and Total Return to Investors is influenced upon converting an un-levered firm into a levered firm.

 

Case:

ABC is an all equity based firm having total assets of Rs.10 million invested equally by the ten members of the firm. Later; five of the members decided to leave the firm with the idea of investing their money into other businesses of their varying interest. The firm takes a bank loan of Rs. 5 million (at 10% p.a.) and pays back the equity capital to those five owners leaving the firm. Thus, half of the equity is replaced with the bank loan.

 

Being a financial analyst, you are required to suggest that:

 

  1. 1.     What impact does this situation have on Return on Equity (ROE) of the firm and Total Return to its Investors?
  2. 2.     Is it beneficial to add more and more debt to the firm’s capital structure? Support your answer with logic

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Replies to This Discussion

Here's the answer to all your confusions..regarding calculations...

My query:

Sir I want to have some info. form your side regarding the gdb. It is not mentioned in the instructions that mathematical calculation carry marks; so we are supposed to discuss the impact of the situation on theoretical basis on ROE of firm and total return. Similarly, the 2nd part would also be discussed on theoretical basis and hence no mathematical calculation is required??

Samra Tariq (BS-Business Administration)

Instructor's reply:
Yes! that's right...instead of calculations or working; conceptual description is required concerning the impact of situation mentioned in the case.
Best of luck!
Regards...

dear samra tariq

i am also student of bs business administration and in 5th semester.which semester have you?can we both discuss our problems regarding study ?

hey both of you I m bs ba student 5 semester I want to discuss my problems regarding my subjects if you both can help me

yes!

in Sha Allah.

faiza nasim butt you are welcome by me

Asalam-o-Alaikum

i m also mbs finals student

we all can join and help each others

Asalam-o-Alaikum

i m also mbs final student.

we all can join and help each others.

Anyone plz upload complete GDB solution its so difficult to solve plz share. 

Complete solution kia ha kisi na :/

noone uploaded the full solution yet

Study Kiay Baghair Kuch nahi banna.

hm ne tw bna liya :P

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