Scribd Logo
Upload

Welcome to Scribd!

  • 10K views

    EBIT-EPS ANALYSIS (By GYANDEEP)

    Uploaded by

    gyandeep kumar
    EBIT-EPS (or Indifference) Analysis: Different financing decisions will have differing impacts on EPS. We can examine the effects of various financing alternatives through an EPS-EBIT analysis, which involves determining the crossover or 'indifference' EBIT at which the EPS is the same between two financing alternatives. Suppose that the firm is comparing the two possible capital structures, 1 and 2. Then, EBIT*, the indifference EBIT, is such that where EBIT* =the indifference EBIT I = the interests T= tax rate DP = the dividends for the preferred shares N = the number of shares outstanding In the absence of tax and preferred shares in the capital structure of the firm, the above expression becomes Other Capital Structure Analysis Tools: (1) Coverage ratios. (2) Lender requirements or debt covenants (3) Bond ratings (4) Industry norms (5) Detailed cash flow analysis including sensitivity and scenario analysis

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    EBIT-EPS ANALYSIS (By GYANDEEP)

    Uploaded by

    gyandeep kumar
    10K views14 pages
    EBIT-EPS (or Indifference) Analysis: Different financing decisions will have differing impacts on EPS. We can examine the effects of various financing alternatives through an EPS-EBIT analysis, which involves determining the crossover or 'indifference' EBIT at which the EPS is the same between two financing alternatives. Suppose that the firm is comparing the two possible capital structures, 1 and 2. Then, EBIT*, the indifference EBIT, is such that where EBIT* =the indifference EBIT I = the interests T= tax rate DP = the dividends for the preferred shares N = the number of shares outstanding In the absence of tax and preferred shares in the capital structure of the firm, the above expression becomes Other Capital Structure Analysis Tools: (1) Coverage ratios. (2) Lender requirements or debt covenants (3) Bond ratings (4) Industry norms (5) Detailed cash flow analysis including sensitivity and scenario analysis

    Original Title

    EBIT-EPS ANALYSIS {by GYANDEEP}

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    EBIT-EPS (or Indifference) Analysis: Different financing decisions will have differing impacts on EPS. We can examine the effects of various financing alternatives through an EPS-EBIT analysis, which involves determining the crossover or 'indifference' EBIT at which the EPS is the same between two financing alternatives. Suppose that the firm is comparing the two possible capital structures, 1 and 2. Then, EBIT*, the indifference EBIT, is such that where EBIT* =the indifference EBIT I = the interests T= tax rate DP = the dividends for the preferred shares N = the number of shares outstanding In the absence of tax and preferred shares in the capital structure of the firm, the above expression becomes Other Capital Structure Analysis Tools: (1) Coverage ratios. (2) Lender requirements or debt covenants (3) Bond ratings (4) Industry norms (5) Detailed cash flow analysis including sensitivity and scenario analysis

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    10K views14 pages

    EBIT-EPS ANALYSIS (By GYANDEEP)

    Uploaded by

    gyandeep kumar
    EBIT-EPS (or Indifference) Analysis: Different financing decisions will have differing impacts on EPS. We can examine the effects of various financing alternatives through an EPS-EBIT analysis, which involves determining the crossover or 'indifference' EBIT at which the EPS is the same between two financing alternatives. Suppose that the firm is comparing the two possible capital structures, 1 and 2. Then, EBIT*, the indifference EBIT, is such that where EBIT* =the indifference EBIT I = the interests T= tax rate DP = the dividends for the preferred shares N = the number of shares outstanding In the absence of tax and preferred shares in the capital structure of the firm, the above expression becomes Other Capital Structure Analysis Tools: (1) Coverage ratios. (2) Lender requirements or debt covenants (3) Bond ratings (4) Industry norms (5) Detailed cash flow analysis including sensitivity and scenario analysis

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 14

    PRESENTED BY:

    GYANDEEP KUMAR
    MBA 2nd SEM
     EBIT-EPS  To design
    analysis is an various
    approach which alternatives of
    helps in debt, equity and
    designing the preference
    optimum capital shares in order
    structure for to maximize the
    the company or EPS at a given
    the firm. level of EBIT.
    It examines how different capital
    structures affect earnings available
    to shareholders (Earning Per
    Share).
    It is the analysis of the effect of
    financing alternatives on earnings
    per share.
     To design the capital structure of
    the firm in such a way so as to
    minimize the cost of capital.
    EBIT-EPS analysis is a method to
    Sales : xxxxx
    (-)V.C : xxx

    =Contribution : xxxxx
    (-)F.C : xxxx

    =EBIT {Earning Before Interest


    and Taxes}
    EBIT : xxxxx
    (-)INTERSET : xxx

    =EBT : xxxxx
    (-)TAX : xx

    =Earning for ESH : xxxxx


    (÷) No. of E.S : xxx

    = EPS {Earning Per Share}


    xxx
    Q: The present capital structure of Gupta Co.
    ltd. is:
    4000, 5% Debentures of Rs 100 each Rs
    4,00,000
    2000, 8% P. Shares of Rs 100 each Rs
    2,00,000
    4000, Equity shares of Rs 100 each Rs
    4,00,000
    Rs 10,00,000
    The present earning of the company before
    interest & taxes are 10% of the invested
    capital every year. The company is in need of
    Rs 2,00,000 for purchasing a new equipment
    and it is estimated that additional
    investment will also produce 10% earning
    before interest & taxes every year.
    The company has asked your advice as to
    STATEMENT SHOWING THE EPS UNDER EXISTING & PROPOSED
    ALTERNATIVE
    ALTENATIVES
    Particular i ii iii
    s Present Debenture P. Share Eq. Share

    EBIT 1,00,000 1,20,000 1,20,000 1,20,000


    (-)Interest 20,000 30,000 20,000 20,000

    EBT 80,000 90,000 1,00,000 1,00,000


    (-)Tax 40,000 45,000 50,000 50,000
    50%
    EAT 40,000 45,000 50,000 50,000
    (-)P. 16,000 16,000 32,000 16,000
    Dividend
    ESH 24,000 29,000 18,000 34,000
    (÷) No. of 4,000 4,000 4,000 6,000
    Equity
    Shares
    EPS Rs 6.00 Rs 7.25 Rs 4.50 Rs 5.67
    Change in - +1.25 -1.50 -0.33
    EPS
     The EBIT level at which the EPS is the
    same for two alternative financial plan
    is referred to as the indifference
    point/level.

    Financial break even point obtained by


    a company at a given level of EBIT for
    which the firm’s EPS is zero.

    If EBIT is less than financial break


    even point, then the EPS is negative.

    If EBIT is more than the financial break


    even point, then more and more fixed
    cost financing option can be used by a
    APPROACHES TO INDIFFERENCE
    ANALYSIS

    •Graphical approach
    •Algebric approach
    BREAKEVEN
    EPS EBIT Debt + Equity
    alternative
    3
    Equity
    Alternative

    2
    Indifference point

    0 EBIT
    $1m $2m $3m $4m
    Algebric approach
    Breakeven analysis

    For newly formed company:


    X(1-T) (X-I)(1-T)
    Equity vs. Debenture =
    N1 = N2

    Equity vs. P. SharesX(1-T)


    = =
    X(1-I)-P
    N1 N3

    X(1-T) (X-1)(1-I)-P
    Equity vs. P. Shares vs. Debenture= =
    N1 N4

     For an existing company: {When debenture are


    outstanding} (X-1)(1-T) (X-I1)(1-T)-P
    N1 =
    N4
    Where,
    X = EBIT
    N1 = No. of Eq. shares outstanding if any eq. shares are
    issued
    N2 = No. of Eq. shares outstanding if both eq. shares &
    debt are issued
    N3 = No. of Eq. shares outstanding if both eq. & pref.
    shares are issued
    N4 = No. of Eq. shares outstanding if both pref. shares &
    debt are issued
    I = Interest on debentures
    P = Pref. Dividend
    T = Corporate Tax Rate
    REFERENCES:
    • KHAN, M.Y. & JAIN, P.K.; FINANCIAL
    MANAGEMENT (TATA MC GRAW- HILL
    PUBLISHING CO. LTD.),1995

    •PANDEY, I.M.; FINANCIAL MANAGEMENT


    (VIKAS PUBLISHING HOUSE LTD.), 2007

    •SAHNI, D.; BUSINESS FINANCE (KEDAR


    NATH RAM NATH), 2009

    You might also like