CALCULATION OF EPS

1) A ltd has 15000 equity shares of Rs.100 each. It is in need of another Rs.25,00,000
following options are available to get this amount
(i) issue 25000 equity shares of Rs.100 each
(ii) issue 25000 8% debentures of Rs.100 each
(iii) issue 25000 8% preference shares of Rs.100 each

EBIT of the company is Rs.800000, tax rate being 50%. Find out the EPS and
select the best alternative.

2) A ltd has an equity share capital of Rs.500,000 (Rs.100 each) company of another
Rs.300000, to get this following options are available
(i) completely through equity shares of Rs.100 each
(ii) Rs.100000 through equity shares of Rs.100 each, and the remaining through
10% debentures.
(iii) completely through 10% debentures
(iv) Rs.100000 through equity shares of Rs.100 each and the balance through
8% preference shares.

EBIT - Rs.150,000 and tax being 50%. Select the best alternative.

3) A company has an equity share capital of Rs.2500000 divided into shares of Rs.100
each. It is in need of another Rs.20,00,000. Following are the options to raise this
amount
(i) completely through equity shares of Rs.100 each
(ii) Rs.1000000 through equity shares of Rs.100 each and remaining through
long term borrowings at 8%.
(iii) Rs.500000 through equity shares of Rs.100 each and remaining through
9% debentures.
(iv) Rs.1000000 through equity shares and balance through 5% preference
shares.

EBIT is Rs.800000 and tax rate being 50%. Find out the best alternative on the
basis of EPS.

4) A company requires a capital of Rs.100,000. EBIT is 15% of this amount. Company

has the following options to raise this amount:
(i) completely through equity shares of Rs.100 each
(ii) 50% of the amount required through equity shares of Rs.100 each and the
balance through 10% debentures
Taxation rate 50%. Find out the EPS and select the best alternative.
5) A ltd has an EBIT of Rs.4,80,000. It has the following capital structure:
(i) Equity share capital of Rs.400,000 (Rs.10 each)
(ii) 14.5% debentures of Rs.10,00,000
(iii) 12% preference shares of Rs.6,00,000

The company is expecting a fluctuation in its EBIT. Calculate the EPS and
percentage change in EPS if

a) EBIT increases by 25%

b) EBIT reduces by 20%
Tax rate-35%
6) Following are the details regarding A Ltd.
Share capital
Equity (Rs. 10) Rs. 1,00,000
10% Preference share (Rs. 10) Rs. 50,000
10% Debentures Rs. 1,00,000
Tax rate 40%
Earnings before interest and tax (EBIT) Rs. 18,333
Calculate EPS:
a. At present level of EBIT.
b. If EBIT increases to Rs. 25,000.
c. If EBIT increases to Rs. 35,000.

7) A company has the following capital structure:

10,000 equity shares of Rs. 10 each Rs. 1,00,000
2,000, 10% preference shares of Rs. 100 each Rs. 2,00,000
2,000, 10% debentures of Rs. 100 each Rs. 2,00,000
Calculate the EPS for each of the following levels of EBIT: (i) Rs. 1,00,000, (ii) Rs. 60,000
and (iii) Rs. 1,40,000. The company is in 50% tax bracket. Also calculate the percentage
change in EPS associated with 40% increase and 40% decrease in EBIT.

8) A ltd has a share capital of Rs.100000 divided into shares of Rs.10 each. It needs
another Rs.50000. Following options are available to get this amount:
(i) completely through equity shares of Rs.10 each
(ii) completely through 12% preference shares
(iii) completely through 10% debentures
Tax rate – 50%
9) A company has the following capital structure
(i) Equity share capital of Rs.2000000 (Rs.100 each)
 (ii) Retained earnings Rs.1000000
(iii) 9% preference shares Rs.1200000
(iv) 7% debentures Rs.800000
Company requires another Rs.2500000. To get this amount following options are
available
(a) issue 20000 equity shares of Rs.100 each at a premium of Rs.25 per share
(b) completely through 10% preference shares
(c) completely through 8% debentures
Tax rate-50% and EBIT- 12% on the entire capital. The P/E ratio for the 1st alternative
is 21.4, 17 in the 2nd alternative and 15.7 in the 3rd alternative.
0n the basis of EPS, suggest the best alternative and also find the market price of the
shares in each of the alternatives.

10) Penta Four Ltd. has currently an all equity shares consisting of 15,000 equity shares of
Rs. 100 each. The management is planning to raise another Rs. 25,00,000 to finance a
major programme of expansion and is considering three alternative methods of
financing:
a. To issue 25,000 equity shares of Rs. 100 each.
b. To issue 25,000, 8% debentures of Rs. 100 each.
c. To issue 25,000, 8% preference shares of Rs. 100 each.
The company’s expected earnings before interest and tax (EBIT) will be Rs. 8,00,000.
Assuming corporate tax rate is 50%. Determine the earnings per share (EPS) in each
alternative and comment which alternative is best and why?

11) A manufacturing company has the following capital structure:

Particulars Amt.
40,000 equity shares of Rs. 50 each 20,00,000
Retained earnings 10,00,000
10% debentures 10,00,000
12% preference shares 10,00,000
Long term debts at 11% 5,00,000
55,00,000
The present EBIT is Rs. 10,00,000. The company is contemplating an expansion
programme requiring an additional investment of Rs. 10,00,000. It is hoped that the
company will be able to maintain the same level of earnings. To raise the additional
capital the company has the following alternatives:
a. To issue debentures at 11%
b. To issue preference shares at 13%
c. To raise the entire additional capital through equity shares
 Examine these alternatives and suggest which alternative is best for the company.
Assume tax rate at 35%.

12) A company plans to raise Rs. 30,00,000 for its new project. It can raise the sales by 2
options:
a. Entire amount by equity.
b. Rs. 15,00,000 by 10% debt and balance by equity.
Calculate the indifference point assuming tax rate is 35% and par value of the share
is Rs. 100.

13) A firm requires Rs. 5,00,000 for its immediate financial plan.
a. Either to raise the entire amount through equity shares.
b. Half of the amount through equity and the remaining half through 10% debt.
Tax rate is 50%. Face value of the share is Rs. 100. Calculate the indifference point.

14) A firm requires a total of Rs. 20,00,000 for an expansion programme. There are two
options available to raise their finance.
a. Raise Rs. 20,00,000 through equity capital.
b. Raise Rs. 10,00,000 through equity and the remaining through 10% debt.
Face value of a share is Rs.10. Calculate the indifference point if income tax is 50%.

15) A project under consideration by a company requires a capital investment of Rs.

60,00,000. Interest on term loan (debentures) is 10% p.a. Tax rate is 50%. Calculate the
point of indifference if in the 1st plan entire amount is raised through equity and in
the 2nd plan, debt-equity ratio is 2:1. Face value of the share is Rs. 10.