UNIT- 3 FINANCIAL DECISION 11/25/2020

Problem 29
ABC ltd capitalized with 1000000 divided into 10000 equity shares of Rs.100
each. The management decided to raise additional capital Rs.1000000 to fiancé
major expansion programme.
 All in equity shares
 All in debentures carrying 8% interest
 Rs.500000 in equity shares and Rs.500000 in debentures carrying
8% dentures.
 Rs.500000 in equity and Rs.500000 in 10% preference shares.
You are required to calculate EPS. If the company EBIT is Rs.600000 assuming
that corporate tax 50%.

Solution:
Calculation of EPS under various capital structure
Particulars Plan I Plan II Plan III Plan IV
1000000eq.sh 1000000 8% 500000 eq+ 5L Eq sh
debs 8% 500000 +5L 10% prfe
debs
EBIT 600000 600000 600000 600000
Less: interest on debs nil 80000 40000 nil
EBT 600000 520000 560000 600000
Less: Tax on 50% 300000 260000 280000 300000
EAT/PAT 300000 260000 280000 300000
Less: Preference nil nil nil 50000
dividend

UNIT- 3 FINANCIAL DECISION PROF.NAGASHREE R PUJARI

SIMS
 UNIT- 3 FINANCIAL DECISION 11/25/2020

Amount available to 300000 260000 280000 250000

equity shareholders
Number of equity 20000 10000 15000 15000
share
EPS 300000/20000 260000/10000 280000/15000 250000/15000
EPS 15 26 18.6 16.66

Recommend:
In case of plan II Where additional capital of Rs.1000000 funds collected by the
issue of debentures. EPS is maximum is Rs.26. therefore Plan II is recommended
and it’s suitable to shareholder point of view.

Problem 30:
The balance sheet of a company is as under:
liabilities amount Assets amount
Equity shares capital of 600000 Fixed assets 1500000
Rs.10 each
10% debentures 800000 Current assets 500000
Profit and loss a/c 200000
Creditors 400000
2000000 2000000

The company’s total assets turnover is 5times its fixed operating cost is
Rs.1000000 and variable cost is 30% of sales. Tax rate is 50%.
Calculate 1. Operating and financial and combined leverages
1. Show the likely level of EBIT if EPS is Rs.5 Rs.3 and Rs.2.
Solution:

UNIT- 3 FINANCIAL DECISION PROF.NAGASHREE R PUJARI

SIMS
 UNIT- 3 FINANCIAL DECISION 11/25/2020

Calculation of sales
Total assets turnover ratio= sales
Total assets
5= sales
2000000
Sales= 2000000X 5
SALES = 10000000
INCOME STATEMENT
Particulars Amount
Sales 10000000
Less: variable cost (30% on 10000000) 3000000
Contribution 7000000
Less: fixed cost 1000000
EBIT 6000000
Less: interest on debt (800000x 10%) 80000
EBT 5920000
Less: Tax @50% 2960000
EAT/PAT 2960000

1. Calculation of operating leverages

Contribution/ EBIT
7000000/6000000
1.16TIMES
2. Calculation of financial leverages
EBIT/EBT
6000000/5920000
1.01Times

UNIT- 3 FINANCIAL DECISION PROF.NAGASHREE R PUJARI

SIMS
 UNIT- 3 FINANCIAL DECISION 11/25/2020

3. Calculation of Combined Leverages

Operating X financial Leverage
1.16 X1.01
1.17Times

2. When EPS is Rs.5

Calculation of EBIT
EPS= Amount available equity shareholders
No. of Equity shares
5=(EBIT-Interest)(1- tax)-preference dividend
No. of equity shares
5 =(EBIT-80000)(1-50/100)-NIL
60000

5=(EBIT-80000)(1-0.5)-NIL
60000
5x 60000= EBIT x 0.5 – 80000 x 0.5
300000= EBIT x 0.5 – 40000
300000+40000= EBIT x 0.5
340000 = EBIT x 0.5
EBIT =340000/0.5
EBIT = Rs.680000

UNIT- 3 FINANCIAL DECISION PROF.NAGASHREE R PUJARI

SIMS
 UNIT- 3 FINANCIAL DECISION 11/25/2020

3. When EPS is Rs.3

Calculation of EBIT
EPS= Amount available equity shareholders
No. of Equity shares
Rs.3 = (EBIT-Interest)(1- tax)-preference dividend
No. of equity shares
Rs.3= (EBIT-80000)(1-0.5)-nil
60000
Rs.3 x 60000= (EBIT x 0.5 -80000 x0.5
180000=EBIT x 0.5 – 40000
180000+40000= EBIT x 0.5
220000= EBIT x 0.5
EBIT =220000/0.5
EBIT = Rs.440000

4. When EPS Rs.2

EPS= Amount available equity shareholders
No. of Equity shares
Rs.2 = (EBIT-Interest)(1- tax)-preference dividend
No. of equity shares
Rs.2= (EBIT-80000)(1-0.5)-nil
60000
Rs.2 x 60000= (EBIT x 0.5 -80000 x0.5
120000=EBIT x 0.5 – 40000
120000+40000= EBIT x 0.5
160000= EBIT x 0.5
EBIT =160000/0.5
EBIT = Rs.320000

UNIT- 3 FINANCIAL DECISION PROF.NAGASHREE R PUJARI

SIMS