7

PRACTICAL QUESTIONS
Q1. The particulars related to Raj Ltd. for the year ended 31st March, 2022
are given as follows:
Output (units at normal capacity) 1,00,000
Selling price per unit ₹40
Variable cost per unit ₹20
Fixed cost ₹10,00,000

The capital structure of the company as on 31st March, 2022 is as follows:

Particulars ₹
Equity Share Capital (1,00,000 shares of ₹10 each) 10,00,000
Reserves and Surplus 5,00,000
Current Liabilities 5,00,000
Total 20,00,000
Raj Ltd. has decided to undertake an expansion project to use the
market potential that will involve ₹20,00,000. The company expects an
increase in output by 50%. Fixed cost will be increased by ₹5,00,000
and variable cost per unit will be decreased by 15%. The additional
output can be sold at the existing selling price without any adverse
impact on the market.
The following alternative schemes for financing the proposed expansion
program are planned:
Alternative Debt Equity Shares
1 ₹5,00,000 Balance
2 ₹10,00,000 Balance Balance
3 ₹14,00,000

CA IQTIDAR MALIK FCA, CS, B com

EBIT AND EPS ANALYSIS 7.2

Slab wise interest rate for fund borrowed is as given follows:

Fund Limit Applicable Interest Rate

Upto ₹5,00,000 10%
Over ₹5,00,000 and upto ₹10,00,000 15%
Over ₹10,00,000 20%
Current market price per share is 200.
Find out which of the above-mentioned alternatives would you
recommend for raj Ltd. with reference to the EPS, assuming a corporate
tax rate is 40%?
Ans. ₹10.60, ₹10.43, ₹10.17

Q2. Earnings before interest and tax of a company are ₹4,50,000. Currently
the company has 80,000 equity shares of ₹10 each, retained earnings
of ₹12,00,000. It pays annual interest of ₹1,20,000 on 12% Debentures.
The company proposes to take up an expansion scheme for which it
needs additional fund of ₹6,00,000. It is anticipated that after
expansion, the company will be able to achieve the same rate of return
on investment as at present. It can raise fund either through debts at
rate of 12% p.a. or by issuing Equity shares at par. Tax rate is 40%.
Compute the earning per share if:
(a) The additional funds were raised through debt.
(b) The additional funds were raised by issue of Equity shares.
Advise whether the company should go for expansion plan and which
sources of finance should be preferred.
Ans. ₹2.61, ₹1.80
Q3. The following data are presented in respect of Quality Automation Ltd.:
Profit before interest and tax 52,00,000
Less: Debenture interest @ 12% 12,00,000
Profit before tax 40,00,000
Less: Income tax @ 50% 20,00,000
Profit after tax 20,00,000
Divided by No. of Equity Shares (₹10 each) 8,00,000
Earnings per share (EPS) ₹ 2.50
Price Earning (PE) Ratio, 10
Market Price Per Share ₹ 25

The company is planning to start a new project requiring a total capital

outlay of ₹40,00,000. You are informed that a debt equity ratio (D/D+E)
higher than 35% push the Ke up to 12.5% means reduce PE ratio to 8
and rises the interest rate on additional amount borrowed at 14%.

CA IQTIDAR MALIK FCA, CS, B com

EBIT AND EPS ANALYSIS 7.3

Find out the probable price of share if:

(1) The additional funds are raised as a loan.
(2) The amount is raised by issuing equity shares.
(Note: Retained earnings of the company is ₹1.2 crore)
Ans. ₹20.66, ₹24.44
Q4. Alpha Ltd. requires funds amounting to ₹80,00,000 for its new project.
To raise the funds, the company has following two alternatives:
(1) To issue Equity Shares of ₹100 each (at par) amounting to
₹60,00,000 and borrow the balance amount at the interest of 12%
p.a.; or
(2) To issue Equity Shares of ₹100 each (at par) and 12% Debentures
in equal proportion.
Find out the point of indifference between two modes of financing and
state which option will be beneficial in different situations assuming
tax rate 30%.
Ans. EBIT at Indifference Point ` 9,60,000

Q5. Aaina Ltd. is considering a new project which requires a capital

investment of ₹9 crores. Interest on term loan is 12% and Corporate
Tax rate is 30%. Calculate the point of indifference for the project
considering the Debt Equity ratio insisted by the financing agencies
being 2: 1.
Ans. EBIT at Indifference Point ` 1,08,00,000
Q6. Yoyo Limited presently has ₹36,00,000 in debt outstanding bearing an
interest rate of 10 per cent. It wishes to finance a ₹40,00,000 expansion
programme and is considering three alternatives: additional debt at 12
per cent interest, preference shares with an 11 per cent dividend, and
the issue of equity shares at ₹16 per share. The company presently has
8,00,000 shares outstanding and is in a 40 per cent tax bracket.
(a) If earnings before interest and taxes are presently ₹15,00,000, what
would be earnings per share for the three alternatives, assuming no
immediate increase in profitability?
(b) Analyse which alternative do you prefer? Compute how much would
EBIT need to increase before the next alternative would be best?
Ans. (a) ₹ 0.495, ₹ 0.305, ₹ 0.651 (b) Increase in EBIT by ` 8,76,000

Q7. XYZ Ltd. decides to use two financial plans and they need ` 50,000 for
total investment.
Particulars Plan A Plan B
Debenture (interest at 10%) ` 40,000 `10,000
Equity share (` 10 each) ` 10,000 `40,000
Total investment needed ` 50,000 ` 50,000
Number of equity shares 1,000 4,000

CA IQTIDAR MALIK FCA, CS, B com

EBIT AND EPS ANALYSIS 7.4

The earnings before interest and tax are assumed at ` 5,000, and
12,500. The tax rate is 50%. Calculate the EPS.
Ans. PLAN A ` 4.25, PLAN B ` 1.44
Q8. ABC Limited has the following capital structure and want to know its
Financial Break-Even Point.
Equity shares (FV = ` 100) 5,00,000
12% Preference Shares (FV = ` 100) 5,00,000
10% Debentures (FV = 100) 10,00,000
Tax Rate 40%
Ans. 11,00,000
Q9. Xylo Ltd. is considering the following two alternative financing plans:
Particulars Plan A Plan B
Equity Shares of ₹10 each 8,00,000 8,00,000
12% Debentures 4,00,000 -
Preference Shares of ₹100 each - 4,00,000
12,00,000 12,00,000
The indifference point between the plans is ₹4,80,000. Corporate tax
rate 30%. Calculate the rate of dividend on preference shares.
Ans. 8.4%
Q10. A new project requires a capital outlay of ` 400 lakhs. The required
amount to be raised either fully by equity shares of ` 100 each or by
equity shares of the value of ` 200 lakhs and by loan of ` 200 lakhs at
15% interest. Assuming a tax rate of 40%, calculate the figure of EBIT
that would keep the equity investors indifferent to the two options.
Ans. 60,00,000
Q11. RM Steels Limited requires ₹10,00,000 for the construction of new
plant. It is considering three financial plans:
(1) The Company may issue 1,00,000 ordinary shares at ₹10 per share.
(2) The Company may issue 50,000 ordinary shares at ₹10 per share
and 5,000 debentures of ₹100 denomination bearing 8% rate of
interest.
(3) The Company may issue 50,000 ordinary shares at ₹10 per share
and 5,000 preference shares at ₹100 per share bearing 8% rate of
dividend.
If RM Steels Limited’s earnings before interest and taxes are ₹20,000,
₹40,000, ₹80,000, ₹1,20,000 and ₹2,00,000. Tax rate is 50%. You are
required to compute the earning per share under each of the three
plans? Which alternative would you recommend for RM Steels and
why?

CA IQTIDAR MALIK FCA, CS, B com