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    Ebit Eps Analysis

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    Uma N
    The company Red Rock Limited is considering two alternatives to raise Rs. 200 crore of external financing: Alternative A is to issue 1.6 crore equity shares at Rs. 125 each. Alternative B is to issue Rs. 200 crore of debentures carrying 8% interest. The indifference point, where EPS is the same under both alternatives, is when PBIT is Rs. 86 crore.

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    Ebit Eps Analysis

    Uploaded by

    Uma N
    275 views2 pages
    The company Red Rock Limited is considering two alternatives to raise Rs. 200 crore of external financing: Alternative A is to issue 1.6 crore equity shares at Rs. 125 each. Alternative B is to issue Rs. 200 crore of debentures carrying 8% interest. The indifference point, where EPS is the same under both alternatives, is when PBIT is Rs. 86 crore.

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    EBIT EPS ANALYSIS

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    EBIT EPS ANALYSIS

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    The company Red Rock Limited is considering two alternatives to raise Rs. 200 crore of external financing: Alternative A is to issue 1.6 crore equity shares at Rs. 125 each. Alternative B is to issue Rs. 200 crore of debentures carrying 8% interest. The indifference point, where EPS is the same under both alternatives, is when PBIT is Rs. 86 crore.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    275 views2 pages

    Ebit Eps Analysis

    Uploaded by

    Uma N
    The company Red Rock Limited is considering two alternatives to raise Rs. 200 crore of external financing: Alternative A is to issue 1.6 crore equity shares at Rs. 125 each. Alternative B is to issue Rs. 200 crore of debentures carrying 8% interest. The indifference point, where EPS is the same under both alternatives, is when PBIT is Rs. 86 crore.

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    1) Red Rock Limited’s capital structure consists of Rs 60 crore worth of equity capital(Rs 10).

    The firm’s current EBIT is 86 crore and interest is 16 crore .

    The firm requires Rs. 200 crore of external financing for which it is considering two
    alternatives:

    Alternative A : Issue of 1.6 crore equity shares of Rs 10 par at Rs. 125 each.
    Alternative B : Issue of Rs.200 crore of debentures carrying 8 percent interest rate.
    Tax rate is 30%.
    What is the EPS-PBIT indifference point?

    1.6*125 = 200

    2) A company’s present capital structure contains 4,000,000 equity shares and 100,000
    preference shares. The firm’s current PBIT is Rs.25 million. Preference shares carry a
    dividend of Rs.3 per share. The earnings per share is Rs.4. The firm is planning to raise Rs.40
    million of external financing. Tax rate is 34.8%. Two financing alternatives are being
    considered:
    (i) issuing 4,000,000 equity shares for Rs.10 each,
    (ii) issuing debentures for Rs.40 million carrying 12 percent interest.

    Required
    (a) Compute the EPS-PBIT indifference point.
    (b) Define the alternative which maximises EPS for various levels of PBIT.

    Current information
    Pref dividend = 3*100,000 =300,000
    Eps =4
    No of Equity shares = 40,00,000
    Tax rate =34.8%

    40 million

    1) equity shares 40,00,000 *10


    2) Debentures =40 million *12 %

    1) Ebit =x
    Interest =-0
    EBT = x
    Tax 34.8
    PAT .652 X
    PREF DIVIDEND =300,000
    .652 X – 300,000/80,00,000

    X
    Interest – 48,00,000
    EBT X-48,00,000
    TAX 34.8%
    PAT.652(X-48,00,000)
    PREF DIVIDEND -300,000
    (.652(X-48,00,000)-300,000)/40,00,000

    i) PBIT = 10,060,123
    ii) When PBIT exceeds Rs. 10,060,123 debt financing maximises EPS

    3) BGM Limited’s present capital structure consists of 20 million equity shares of Rs.10 each. It
    requires Rs.60 million of external financing. It is considering two alternatives:

    Alternative 1 : Issue of 3 million equity shares of Rs.10 par at Rs.15 each


    and 1.5 million preference shares of Rs.10 par, carrying a dividend rate of 10 percent.
    Alternative 2 : Issue of 2 million equity shares of Rs.10 par at Rs.15 each
    and debentures for Rs.30 million carrying an interest rate of 11 percent
    The company’s tax rate is 35 percent?

    What is the EPS-PBIT indifference point?

    25.13

    4) Keerthinath Corporation presently has two million outstanding equity shares (Rs.10 par)
    selling at Rs.11 per share and no outstanding debt . It needs Rs.8 million of additional funds
    which can be raised in two ways:

    (a) issue of 0.8 million equity shares at Rs.10 per share,


    (b) issue of debt capital carrying 14 percent interest.

    Keerthinath Corporation’s tax rate is 35 percent. What is the indifference point?

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