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Problems On Eps

The document discusses financial management concepts including calculating earnings per share (EPS), operating leverage, and financial leverage given income statements and capital structure information. Several word problems are presented with solutions showing the calculations and percentages changes in EPS given changes in EBIT.

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Shripradha Acharya
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194 views5 pages

Problems On Eps

The document discusses financial management concepts including calculating earnings per share (EPS), operating leverage, and financial leverage given income statements and capital structure information. Several word problems are presented with solutions showing the calculations and percentages changes in EPS given changes in EBIT.

Uploaded by

Shripradha Acharya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FINANCIAL MANAGEMENT 11/11/2020

jSOUNDARYA EDUCATIONAL TRUST®

SOUNDARYA INSTITUTE OF MANAGEMENT AND SCIENCE

Unit-III
FINANCIAL DECISION

Problems is based on % changes in EPS

Problem 20:
The P ltd has equity share capital of Rs.1000000 in a shares of Rs.10 each and
debt capital of Rs.1000000 with interest rate of 20%. The outcome of a company
increased by 50% from 100000 units to 150000 units.
 Selling price per unit Rs.20
 Variable cost per unit Rs.10
 Fixed cost Rs.500000
 Tax @ 50%
Calculate percentages changes in EPS and operating leverages, financial
leverages at 100000 units and 150000 units.

Solution:
Prepare income statement
particulars Present Changes
100000units 150000units
Sales 2000000 3000000
Present(100000X20)
Changes(150000X20)
Less: variable cost 1000000 1500000
Present (100000X10)
Changes(150000X10)
CONTRIBUTION 1000000 1500000
Less: Fixed cost 500000 500000
EBIT 500000 1000000
Less: Interest on debts (1000000X20%) 200000 200000

FINANCIAL MANAGEMENT NAGASHREE R PUJARI


FINANCIAL MANAGEMENT 11/11/2020

EBT 300000 800000


Less: Tax @50% on 300000 150000 400000
Changes: 800000X50%
EAT/PAT 150000 400000
Less: Preference Dividend Nil Nil
Earnings available to equity shareholders 150000 400000
Number of equity share 100000 100000
150000 400000
EPS = Earnings available to equity shareholders 100000 100000
Number of equity share

EPS 1.5 4

Working note:
1. Calculation of total number of equity shares:
Number of equity share= Total equity share capital
Face value of share

= 1000000
10
= 100000 per share
2. Calculation of operating leverage:
= contribution/EBIT
1. PRESENT= 1000000/500000 = 2 TIMES
2. CHANGES= 1500000/1000000= 1.5 TIMES
3. Calculation of financial leverage
= EBIT/EBT
1. PRESENT = 500000/200000= 1.6 TIMES
2. CHANGES = 1000000/800000= 1.25 TIME

4. Percentages changes in EPS


EPS (Present) = 1.5
EPS (Changes)= 4
Changes in EPS= 2.5

FINANCIAL MANAGEMENT NAGASHREE R PUJARI


FINANCIAL MANAGEMENT 11/11/2020

5. Calculation of % changes in EPS:


= changes in EPS X 100
Present EPS

= 2.5 X 100
1.5
=166.66%

PROBLEM 21 2016 for 14 marks


A Co. has EBIT of Rs.480000 and its capital structure consist of the following
securities:
1. Equity share capital ( Rs.10) Rs.400000
2. 12% preference share of Rs.600000
3. 14.5% debentures rs.1000000
The company is facing fluctuation in its sales.
What would be the percentage changes in EPS?
A. If EBIT of the company increased by 25%
B. If EBIT of the company deceased by 25%
The company tax rate is 35%.
Solution:
1. Working note:
a. When EBIT increased by 25%
= Present EBIT+ Increased by 25%
= 480000+ 480000X25%
=480000+120000
EBIT =600000

b. When EBIT decreased by 25%


= Present EBIT – decreased by 25%
=480000- 480000X 25%
=480000-120000
EBIT= 360000

2. Calculation of Number of equity share:


= 400000/10
=40000share

FINANCIAL MANAGEMENT NAGASHREE R PUJARI


FINANCIAL MANAGEMENT 11/11/2020

Prepare income statement


Particulars Present Increased Deceased
EBIT by 25% by 25%
480000 600000 360000
EBIT 480000 600000 360000
Less: interest on debenture 145000 145000 145000
(1000000X14.5%)

EBT 335000 455000 215000


Less: Tax @35% 117250 159250 75250
EAT/PAT 217750 295750 139750
Less: preference Dividend 72000 72000 72000
(600000X12%)
Amount available to equity shareholders 145750 223750 67750
Number of equity share 40000 40000 40000

EPS=Amount available to equityshareholders 145750 223750 67750


Number of equity share 40000 40000 40000

EPS 3.64 5.59 1.69

3.CALCULATION % CHANGES IN EPS


Changes in EPS=
1. EPS@ Present 480000= 3.64
EPS @ Increased 600000= 5.59
Changes in EPS= 1.95

1. EPS@ present 480000= 3.64


EPS@ decreased 360000= 1.69
Changes in EPS = 1.95
Therefore % CHANGES IN EPS
Changes in EPS X 100
Present EPS
1. EBIT Increased by 25%
=1.95
3.64X 100

FINANCIAL MANAGEMENT NAGASHREE R PUJARI


FINANCIAL MANAGEMENT 11/11/2020

= 53.57% increased EPS


2. EBIT deceased by 25%
= 1.95
3.64 X 100
= 53.57% Decreased EPS
Problem 22 : 2016 for 5 marks
 EBT Rs.400000
 Tax rate @50%
 Number of equity share Rs.20000
 Calculate EPS
Solution:
Calculation of EPS
PARTICULARS AMOUNT
EBT 400000
Less: Tax @50% 200000
EAT/PAT 200000
Less: preference dividend nil
Amount available to equity shareholders 200000
Number of equity share 20000
EPS= Amount available to equity shareholders 200000
Number of equity share 20000
EPS 10

FINANCIAL MANAGEMENT NAGASHREE R PUJARI

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