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.