CA Inter P6 · Chapter 6 · Question 6 of 9
A company pays annual debenture interest of ₹ 3,00,000 and preference dividend of ₹ 70,000. The tax rate is 30%. Its financial break-even point (the EBIT at which EPS is zero) is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) ₹ 4,00,000
Explanation
At the financial break-even point, EBIT just covers interest and the pre-tax profit needed to pay preference dividend. Financial BEP = I + PD/(1 - t) = 3,00,000 + 70,000/0.70 = 3,00,000 + 1,00,000 = ₹ 4,00,000. Simply adding 70,000 ignores that preference dividend is paid out of after-tax profit, and grossing up interest as well is wrong because interest is tax-deductible.
More Financing Decisions – Leverages MCQs
- Q8Nandini Ltd has a contribution of ₹ 20,00,000 and a degree of operating leverage of 2.5. Its fixed operating costs are:
- Q9A firm with a high degree of operating leverage and a high degree of financial leverage is best described as:
- Q1Annual sales of Mehta Castings are ₹ 40,00,000, variable costs are 60% of sales and fixed operating costs are ₹ 6,00,000. The degree of…
- Q2A company has EBIT of ₹ 10,00,000, debenture interest of ₹ 2,50,000 and preference dividend of ₹ 1,40,000. The tax rate is 30%. The degree…
- Q3A firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. If sales increase by 10%, earnings per share…