CA Inter P6 · Chapter 5 · Question 4 of 9
Swastik Ltd needs ₹ 50 lakh for a new venture. Plan I: issue 5,00,000 equity shares of ₹ 10 each. Plan II: issue ₹ 20 lakh of 12% debentures and 3,00,000 equity shares of ₹ 10 each. The tax rate is 30%. The EBIT at which EPS is the same under both plans is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) ₹ 6,00,000
Explanation
Interest under Plan II = 12% x 20,00,000 = ₹ 2,40,000. Set EPS equal: EBIT(1 - 0.3)/5,00,000 = (EBIT - 2,40,000)(1 - 0.3)/3,00,000. Then 3 EBIT = 5 EBIT - 12,00,000, so EBIT = ₹ 6,00,000. Check: EPS = 6,00,000 x 0.7 / 5,00,000 = ₹ 0.84 under Plan I, and 3,60,000 x 0.7 / 3,00,000 = ₹ 0.84 under Plan II.
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