question_answer
Daksh Ltd requires an investment of Rs. 60,00,000 to earn Earning Before Interest and Tax (EBIT) of Rs. 8,00,000. In order to raise Rs. 60,00,000, there are two proposals: Proposal A |
6,00,000 equity shares of Rs. 10 each |
Rate of tax = 20% |
Proposal B |
4,00,000 equity shares of Rs. 10 each |
10%? 20,00,000 debentures |
Rate of tax = 20% |
Which proposal, if accepted, would ensure better earnings for the shareholders? |
Decide on the basis of Earning Per Share (EPS). |
Answer:
Particulars | Proposal A (Rs.) | Proposal ?B?(Rs.) |
Earning Before Interest and Tax [EBIT] | 8,00,000 | 8,00,000 |
(-) Interest on Debentures @ 10% | ?? | (2,00,000) |
Earning Before Tax (EBT) | 8,00,000 | 6,00,000 |
(-) Tax @ of 20% | (1,60,000) | (1,20,000) |
| 6,40,000 | 4,80,000 |
Earning Per Share (EPS)\[=\frac{Earning\,After\,Tax\,(EAT)}{Number\,of\,Shares}\] | \[\frac{6,40,000}{6,00,000}=Rs.1.06\] | \[\frac{4,80,000}{4,00,000}=Rs.1.20\] |
Earning per share will be more, if proposal B is accepted.