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Assume that ABC Ltd has equity share capital of ₹15,00,000 divided into shares of Rs150 each....

Assume that ABC Ltd has equity share capital of ₹15,00,000 divided into shares of Rs150 each. The company wishes to raise additional total capital of ₹6,00,000 for expansion through ₹3,00,000 in equity shares and ₹3,00,000 in debts at 10%. The EBIT of the company is ₹3,00,000 and tax rate is 50%. Calculate EPS. Suggest what will happen to EPS if entire capital was raised through debts.   

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Answer #1

total number of shares = (₹15,00,000 existing equity +₹ 300,000 new equity) / ₹150 per share

=>12,000 shares.

total debt = ₹300,000.

case 1 EPS:

EBIT 3,00,000
less:interest (3,00,000*10%) (30,000)
EBT 270,000
less: tax @50% (135,000)
net income 135,000
EPS (net income / number of shares ) => (135,000/12,000 shares) ₹11.25

case 2:

number of shares = 15,00,000 /150 per share =>10,000 shares.

total debt = 600,000

EBIT 300,000
less:interest (600,000*10%) (60,000)
EBT 240,000
less:tax @50% (120,000)
net income 120,000
EPS (120,000/10,000) ₹1.20
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