Sums on Capital Structure = EBIT – EPS Analysis
Question: 1
Solution:
EBIT = Rs. 2,50,000/-
Existing capital Structure = Nil
No. of Alternatives = 2
Particulars Option - I OPTION - II
Earnings Before Interest & Tax (EBIT) 2,50,000 2,50,000
Less: Interest - 30,000
Earnings Before Tax (EBT) 2,50,000 2,20,000
Less: Tax ( 20%) 50,000 44,000
Earnings After Tax (EAT) 2,00,000 1,76,000
Less: Preference Dividend - -
Earnings Available for Equity Shareholders 2,00,000 1,76,000
Total No. of Equity Shares 1,00,000 50,000
Earnings Per Share (EPS) (Rs.) 2.00 3.52
Comment / Advice:
• The company should select Option II for raising funds of Rs. 10,00,000/-, comprises of Rs.
50,000/- through 50,000 equity shares of Rs. 10/- each and RS. 50,000/- through Debt at 6%
per annum.
• Option II give the highest Earnings Per Share (EPS) of Rs. 3.52/- as compare to other
alternative having EPS of RS. 2.00/-
• With the selection of Alternative II company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
Question: 2
Solution:
EBIT = Rs. 8,00,000/-
Existing capital Structure = 15,00,000/- (15,000 Equity Shares)
No. of Alternatives = 3
Particulars Alternative - A Alternative - B Alternative - C
Earnings Before Interest & Tax (EBIT) 8,00,000 8,00,000 8,00,000
Less: Interest - 2,00,000 -
Earnings Before Tax (EBT) 8,00,000 6,00,000 8,00,000
Less: Tax ( 50 %) 4,00,000 3,00,000 4,00,000
Earnings After Tax (EAT) 4,00,000 3,00,000 4,00,000
Less: Preference Dividend - - 2,25,000
Earnings Available for Equity
4,00,000 3,00,000 1,75,000
Shareholders
No. of Equity Shares
a. Existing 15,000 15,000 15,000
b. New 25,000 - -
Total No. of Equity Shares 40,000 15,000 15,000
Earnings Per Share (EPS) (Rs.) 10.00 20.00 11.67
Comment / Advice:
• ABC company for raising funds of Rs. 25,00,000/-, with existing capital of RS. 15,00,000/-
having 15,000 equity shares of Rs. 10/- each should select Alternative B.
• Alternative B give the highest Earnings Per Share (EPS) of Rs. 20.52/- as compare to
Alternative A and C having EPS of Rs. 10.00/- and RS. 11.67/- respectively.
• Alternative B comprises of 25,000 Debentures of Rs. 100/- each at 8% per annum.
• With the selection of Alternative B company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
• In such case to optimize risk Alternative C can be considered, wherein earnings per share have
been dropped significantly.
Question: 3
Solution:
EBIT = Rs. 20,00,000/-
Existing capital Structure = 56,00,000/- (5,00,000 equity shares of Rs. 10/- each and 8% Debenture
of Rs. 6,00,000/-)
No. of Alternatives = 3
Particulars Alternative - I Alternative - II Alternative - III
Earnings Before Interest & Tax (EBIT) 20,00,000 20,00,000 20,00,000
Less: Interest
a. 8% Debentures (Existing) 48,000 48,000 48,000
b. 12% Debentures (New) 6,00,000 3,00,000 1,50,000
c. 15% Term Loan (New) - - 1,87,500
Earnings Before Tax (EBT) 13,52,000 16,52,000 16,14,500
Less: Tax ( 30%) 4,05,600 4,95,600 4,84,350
Earnings After Tax (EAT) 9,46,400 11,56,400 11,30,150
Less: Preference Dividend - - 2,50,000
Earnings Available for Equity Shareholders 9,46,400 11,56,400 8,80,150
No. of Equity Shares
a. Existing 5,00,000 5,00,000 5,00,000
b. New - 2,50,000 -
Total No. of Equity Shares 5,00,000 7,50,000 5,00,000
Earnings Per Share (EPS) 1.89 1.54 1.76
Comment / Advice:
• ABC Ltd. for raising funds of Rs. 50,00,000/-, with existing capital of Rs. 56,00,000/- having
5,00,000 equity shares of Rs. 10/- each and Rs. 6,00,000/- through 8% Debentures should
select Alternative I.
• Alternative I give the highest Earnings Per Share (EPS) of Rs. 1.89/- as compare to
Alternative II and III having EPS of Rs. 1.54/- and Rs. 1.76/- respectively.
• Alternative I comprise of issue Debentures at 12% per annum.
• With the selection of Alternative I company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
• In such case to optimize risk Alternative III can be considered, wherein earnings per share have
not been dropped significantly.
Question: 4
Solution:
EBIT = Rs. 9,00,000/-
Existing capital Structure = 50,00,000/- (20,000 equity shares of Rs. 100/- each, Retained Earnings
of Rs. 10,00,000, 9% Preference Shares of Rs. 12,00,000 and 8% Debenture of Rs. 8,00,000/-)
No. of Alternatives = 3
Particulars Alternative - I Alternative - II Alternative - III
Earnings Before Interest & Tax (EBIT) 9,00,000 9,00,000 9,00,000
Less: Interest
a. 7% Debentures (Existing) 56,000 56,000 56,000
b. 8% Debentures (New) - - 2,00,000
Earnings Before Tax (EBT) 8,44,000 8,44,000 6,44,000
Less: Tax ( 35%) 2,95,400 2,95,400 2,25,400
Earnings After Tax (EAT) 5,48,600 5,48,600 4,18,600
Less: Preference Dividend
a. 9% Preference Shares (Existing) 1,08,000 1,08,000 1,08,000
b. 10% Preference Shares (New) - 2,50,000 -
Earnings Available for Equity Shareholders 4,40,400 1,90,600 3,10,600
No. of Equity Shares
a. Existing 20,000 20,000 20,000
b. New 25,000 - -
Total No. of Equity Shares 45,000 20,000 20,000
Earnings Per Share (EPS) 9.79 9.53 15.53
Comment / Advice:
• For raising funds of Rs. 25,00,000/-, with existing capital of 20,000 equity shares of Rs. 100/-
each, Retained Earnings of Rs. 10,00,000, 9% Preference Shares of Rs. 12,00,000 and 8%
Debenture of Rs. 8,00,000/-should select Alternative III.
• Alternative III give the highest Earnings Per Share (EPS) of Rs. 15.53/- as compare to
Alternative I and II having EPS of Rs. 9.79/- and Rs. 9.53/- respectively.
• Alternative I comprise of issue Debentures at 8% per annum.
• With the selection of Alternative III company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
• In such case to optimize risk Alternative I can be considered, wherein earnings per share be
dropped significantly.
Question: 5
Solution:
EBIT = Rs. 1,60,000/-
Existing capital Structure = Nil
No. of Alternatives = 3
Particulars Alternative - A Alternative - B Alternative - C
Earnings Before Interest & Tax (EBIT) 1,60,000 1,60,000 1,60,000
Less: Interest - 16,000 -
Earnings Before Tax (EBT) 1,60,000 1,44,000 1,60,000
Less: Tax ( 30%) 2,95,400 2,95,400 2,25,400
Earnings After Tax (EAT) 80,000 72,000 80,000
Less: Preference Dividend - - 16,000
Earnings Available for Equity Shareholders 80,000 72,000 64,000
Total No. of Equity Shares 40,000 20,000 20,000
Earnings Per Share (EPS) 2.00 3.60 3.20
Comment / Advice:
• XYZ Ltd. for raising funds of Rs. 4,00,000/- with should select Alternative B.
• Alternative B give the highest Earnings Per Share (EPS) of Rs. 3.60/- as compare to
Alternative A and C having EPS of Rs. 2.00/- and Rs. 3.20/- respectively.
• Alternative B comprise of issue of Equity Shares Rs. 2,00,000 and Debentures at 8% per
annum for Rs. 2,00,000/-.
• With the selection of Alternative B company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
• In such case to optimize risk Alternative C can be considered, wherein earnings per share
haven’t dropped significantly.
Question: 6
Solution:
EBIT = Rs. 1,60,000/-
Existing capital Structure = Nil
No. of Alternatives = 3
Particulars Alternative - A Alternative - B Alternative - C
Earnings Before Interest & Tax (EBIT) 1,60,000 1,60,000 1,60,000
Less: Interest 8,000 48,000 1,08,000
Earnings Before Tax (EBT) 1,52,000 1,12,000 52,000
Less: Tax ( 50%) 76,000 56,000 26,000
Earnings After Tax (EAT) 76,000 56,000 26,000
Less: Preference Dividend - - -
Earnings Available for Equity Shareholders 76,000 56,000 26,000
Total No. of Equity Shares 36,000 24,000 20,000
Earnings Per Share (EPS) 2.11 2.33 1.30
Comment / Advice:
• AB Ltd. for raising funds of Rs. 10,00,000/-, should select Alternative B.
• Alternative B give the highest Earnings Per Share (EPS) of Rs. 2.33/- as compare to
Alternative A and C having EPS of Rs. 2.11/- and Rs. 1.30/- respectively.
• Alternative B comprise of issue Equity Shares of RS. 6,00,000/- and Debt of Rs. 4,00,000 at
12% per annum.
• With the selection of Alternative B company will attract fixed charges every year in the form of
Interest and increases risk of liquidity. Company should consider the said risk.
• In such case to optimize risk Alternative A can be considered, wherein earnings per share not
dropped significantly.
