EBIT – EPS Analysis

EBIT-EPS analysis is an important tool for analyzing the impact of

alternative methods of financing on the earnings per share of a firm. Given
a particular level of earnings before interest and tax, the earnings available
to shareholders (or earning per share) may be different under different
methods of mix of financing. Further the impact of different method of
financing under different levels of EBIT on the earnings per share can also
be established with the help of a EBIT - EPS analysis.
Question 1 :
The company requires Rs.5,00,000 for construction of a new plant . It has
identified the following three financing options :
1. Issue of 50,000 equity shares at Rs.10 each
2. Issue of 25,000 equity shares at Rs. 10 each and 2500 8% debentures of
Rs.100 each
3. Issue Of 25,000 equity shares at Rs.10 each and 2500 10% preference
shares of Rs.100 each
Assuming EBIT after construction would be Rs.1,00,000 which financing
option would you recommend assuming tax rate is 35%
Question 2 :

ABC company limited has currently an all equity capital structure consisting
of 15,000 equity shares of Rs 100 each. The management is planning to
raise another Rs 25,00,000 to finance a major program of expansion and is
considering three alternative method of financing :
1. to issue 25,000 equity shares of rupees 100 each
2. to issue 25,000, 8% Debentures of rupees 100 each
3. to issue 25,000, 8% preference shares of rupees Rs.100 each

The companies expected earning before interest and taxes will be Rs.
8,00,000. Assuming a corporate tax of all 50% , determine the earning per
share (EPS) in each alternatives and comment which alternative is best and
why?
Question 3 :
A Ltd company has equity share capital of Rs 5,00,000 divided into shares of
Rs 100 each. It wishes to raise further Rs. 3,00,000 For expansion come
modernization plans. the company plans the following financing schemes:
1. all common stocks
2. Rs. 1,00,000 in common stock and Rs. 2,00,000 in debt at 10% per
annum
3. All debt at 10% per annum
4. Rs. 1,00,000 in common stock and Rs 2,00,000 in preferential capital
with the rate of dividend at 8%

The company is expected earning before interest and tax are Rs. 1,50,000.
The corporate rate of tax is 50%. Determine the earning per share in each
plan and comment the implications of financial leverage
Impact of Leverage on Loss
Question 4 :
Taking the figures in question 3, a concern suffers a loss of ₹70,000. Discuss
the impact of leverage under all the four plans .
Question 5 :
AB limited needs ₹10,00,000 for expansion. The expansion is expected to
yield an annual EBIT of ₹1,60,000. In choosing a financial plan, AB limited
has an objective of maximizing earning per share. It is considering the
possibility of issuing equity shares and raising debt of ₹1,00,000 or
₹4,00,000 or ₹6,00,000. The current market price per share is ₹25 and is
expected to drop to ₹20 if the funds are borrowed in excess of ₹5,00,000.
Funds can be borrowed at the rate indicated below :
1. up to ₹1,00,000 at 8%
2. Over ₹ 1,00,000 up to ₹5,00,000 at 12%
3. over ₹ 5,00,000 at 18%
Assume a tax rate of 50%. Determine the EPS for the three financing
alternatives and suggest the scheme which would meet the objective of
management.