1. A firm requires total capital funds of Rs.

50 lakhs and has two

options. All equity and half equity and half 15% debt. The equity
shares can be currently issued at Rs.100 per share. The expected
EBIT of the company is Rs. 5,00,000 with tax rate at 40%. Find
out the EPS under financial mix.
Statement showing computation EPS

particulars All equity Half equity & half

50,000 shares 15% debt
25,00,000 equity
25,00,000 debt
Earnings before int 5,00,000 5,00,000
& tax (EBIT)
Less interest --- 3,75,000
Earnings after int 5,00,000 1,25,000
and before tax
Less Tax @40% 2,00,000 50,000
Earnings after int & 3,00,000 75,000
tax / earnings
available to equity
share holders
EPS 6 Rs 3 Rs

Working notes:
no. of shares to be issued
50,00,000 /100 =50,000 SHARES
2nd option =25,00,000 /100 =25,000
Calculation of interest
25,00,000 x15%= 3,75,000
Calculation of tax
1st option5,00,000 x 40% =2,00,000
2nd option 1,25,000 x40%=50,000
 Formula for calculating EPS
Earnings available to equity shareholders / no.of equity shares
1st option – 3,00,000 /50,000 =6 Rs
2nd option – 75,000 / 25,000 =3 Rs

Page no. 6.50 Problem no. 5

2. Razak Ltd. has a capital structure consisting of equity capital only.
It has 50,000 equity shares of Rs.10 each. Now the company wants
to raise a fund for Rs. 1,25,000 for its various investment purposes
after considering the following three alternative methods of
financing.
i. If it issues 12,500 equity shares of Rs.10 each.
ii. If it borrows a debt of Rs. 1,25,000 at 8% interest and
iii. If it issues 1,250 8% preference shares of Rs. 100 each
Show the effect of EPS under various methods of financing if
EBIT (after additional investment) are 1,56,250 and the rate of
taxation is @ 50%.
 Statement showing evaluation of financial alternatives
Particulars 12,500 equity 8% debt 1,250
shares 1,25,000 8%pref
shares
EBIT 1,56,250 1,56,250 1,56,250
LESS interest --- 10,000 ---
Earnings after int. 1,56.250 1,46,250 1,56,250
before tax
Less Tax @ 50% 78,125 73,125 78,125
Earnings after 78,125 73,125 78,125
interest and tax
Less preference - - 10,000
dividend
Earnings available 78,125 73,125 68,125
to equity share
holders
Earnings per shares 1.25 Rs 1.4625 Rs 1.3625 Rs.

Working notes
OPTION II
8% Debt - interest - 1,25,000 x8% =10,000
Calculation of tax
1st option - 1,56,250 x50%=78,125
2nd option – 1,46,250 x50%=73,125
3rd option -1,56,250 x50%= 78125
OPTION III
8% Preference Dividend – 1250 x100x8%=10,000
Earnings per share (EPS)
Earnings available to shares holders / No. of equity shares
1st option
Earnings available to equity shareholders 78,125
No. of equity shares
Existing shares = 50,000 + new 12500= 62,500
EPS = 78,125 / 62,500 = 1.25 Rs.
2nd option
Existing shares = 50,000
EPS = 73,125 /50,000
=1.4625 Rs.
3rd option
No. of equity shares
Existing shares 50,000
EPS = 68,125 / 50,000
1.3625 Rs.
The company has to choose the 2nd option because the EPS is more
compared to option 1 & option 2.
So the company has to borrows a debt of Rs. 1,25,000 at 8% interest.
 Page no. 6.51. problem no.7.
3. One – up Ltd. has equity share capital of Rs. 5,00,000 divided into
shares of Rs.100 each. It wishes to raise further Rs. 3,00,000 for
expansion. The company plans the following financing alternatives.
i. By issuing equity shares only.
ii. Rs. 1,00,000 by issuing equity shares and Rs. 2,00,000
through debentures or term loan @10% per annum
iii. By raising term loan only at 10% per annum
iv. Rs. 1,00,000 by issuing equity shares and Rs. 2,00,000 by
issuing 8% preference shares.
You are required to suggest the best alternatives giving your comment
assuming that the estimated earnings before interest and taxes (EBIT)
after expansion is Rs. 1,50,000 and corporate rate of tax is 35%.
 Statement showing evaluation of financial alternatives
Particulars Equity Equity shares Term 1,00,000
shares- 1,00,000 loan equity shares
3,00,000 &2,00,000 deb 10% & 2,00,000
or term loan 8% pref.
@10% shares

EBIT 1,50,000 1,50,000 1,50,000 1,50,000

LESS INT - 20,000 30,000 ---

Earnings after int. 1,50,000 1,30,000 1,20,000 1,50,000

before tax
Tax @ 35% 52,500 45,500 42,000 52,500
Earnings after int 97,500 84,500 78,000 97500
& Tax
Less preference - - - 16,000
dividend
Earnings available 97,500 84,500 78,000 81,500
to equity share
holders
EPS 12.18 14.08 RS 15.6 Rs 13.58
Rs

WORKING NOTES
CALCULATION OF INTERST
2nd Option 2,00,000 x 10% = 20,000
3rd option 3,00,000 x10% = 30,000
Calculation of tax
1st option =1,50,000 x35%=52,500
2nd option= 130,000 x35%=45,500
3rd option =1,20,000 x35%=42,000
 4th option =1,50,000 x35%=52,500
Calculation of preference dividend
2,00,000 x 8% =16,000
CALCULATION OF EARNINGS AVAILABLE TO SHARE
HOLDERS
FORMULA
Earnings available to equity share holders / No of equity
shares
Calculation of no. of equity shares
particulars Option 1 Option 2 Option 3 Option 4
Existing 5,00,000 5,000 5,000 5000
equity /100
shares 5,000
New 3,00,000 1,00,000/10 ---- 100000/100
equity /100 0 1000
shares 3,000 1,000
Total 8,000 6000 5000 6,000
equity
shares
EPS 97,500 84,500/6,00 78,000/5000 81,500/6000
/8,000 0 15.6 Rs 13.58
12.18 Rs 14.08 RS

The company raise fund through the 10% term loan, since the Eps is
more compared to 1st,2nd &4th
Page No. 6.50. problem No. 6.
Good shape company has currently an ordinary share capital of Rs.25
lakh, consisting of 25,000 shares of Rs.100 each. The management is
planning to raise another Rs.20 lakh to finance a major programme of
expansion through one of four possible financing plans. The options are
as under
i. Entirely through ordinary shares
ii. Rs.10,00,000 through ordinary shares and Rs.10 lakh through
long term borrowings at 15% interest per annum
iii. Rs. 5 lakhs ordinary shares and Rs.15 lakh through long term
borrowings at 16% interest per annum
iv. Rs. 10,00,000 through ordinary shares and Rs. 10,00,000
through preference shares with 14% dividend.
The company’s expected EBIT will be Rs.8 lakh. Assuming a
corporate tax rate of 50%. Determine the EPS in each alternatives and
suggest the best possible alternatives.
 Statement showing evaluation of financial alternatives

Particulars 20 lakhs 10,00,000- 5 lakhs- 10 lakhs –

ordinary ordinary shares ordinary shares ordinary share
shares & 10,00,000 & 15 lakhs 16% 10 lakhs, 14%
@15% long long term pref. shares
term loan borrowings
EBIT 8,00,000 8,00,000 8,00,000 8,00,000
LESS INTEREST - 1,50,000 2,40,000 -
Earnings after interest 8,00,000 6,50,000 5,60,000 8,00,000
before tax
Less tax @ 50% 4,00,000 3,25,000 2,80,000 4,00,000
Earnings after tax 4,00,000 3,25,000 2,80,000 4,00,000
Less preference dividend - - - 1,40,000
Earnings available to 4,00,000 3,25,000 2,80,000 2,60,000
equity shareholders
EPS 4,00,000 3,25,000 / 35000 2,80,000 /30,000 2,60,000 / 35000
/45000 Rs. 9.29 Rs. 9.33 Rs.7.43
Rs. 8.89

Choose 3rd financial plans that is issue of 5 lakhs ordinary shares & 15,00,00 6% long term
loan.

Working notes:
Calculation of I II III IV
interest
- 1,50,000 15,00,000 X16% -
2,40,000
Calculation of 8,00,000 x50%= 650000x50% 5,60,000 x50% 8,00,000 x50%
tax 4,00,000 3,25,000 2,80,000 4,00,000
Calculation of - - - 10,00,000 x 14%
preference 1,40,000
dividend
No. of 25,000 25,000 25,000 25,000
ordinary shares 20,00,000/100 10,00,000/100 5,00,000 /100 10,00,000 /100
20,000 10,000 5,000 10,000

Total no. of 25000+20000 25000+10000 25000+5000 25000+10000

shares 45,000 35,000 30,000 35,000
EPS 4,00,000 /45000 3,25,000 / 35000 2,80,000 /30,000 2,60,000 / 35000
Rs. 8.89 Rs. 9.29 Rs. 9.33 Rs.7.43
 Page no. 6.50. problem no. 4
Calculate EPS of solid Ltd. and Sound Ltd. assuming
a. 20% before tax rate of return on asset
b. 10% before tax rate of return on assets based on the
following data:
Assume a 50% income tax in both the cases
Solid Ltd (Rs. In Sound Ltd (Rs. In
lakh lakh
Assets 100 100
Debt - 50
12% debentures &
loan
Equity 100(shares of Rs. 50 (shares of Rs.10
10 each) each
Particulars Solid ltd Sound Rs. In
Rs. In lakhs
lakhs 50lakh
Equity shares
12% deb
loand
50 (share or
Rs. 100
EBIT 20 20
Less interest - 6
Earnings after 20 14
interest & tax
Less Tax @ 50% 10 7
Earnings available 10 7
to equity share
holders
EPS (EARNINGS 10/100 =.1 Rs 7/50=.14
AVAILABLE TO
EQUITY SHARE
HOLDERS / NO
OF EQUITY
SHARES

OPTION A
EBIT
SOLID LTD 100 X20% = 20
SOUND LTD 100X20%=

Working notes
Particulars Solid ltd Sound ltd
Calculation of - 50,00,000 x12%
interest = 6,00,000
Calculation of tax 20x10% = 10 14x50% =7
 Option B
Particulars Solid ltd Sound Rs. In
Rs. In lakhs
lakhs 50lakh
12%
EBIT 10 10
LESS interest - 6
Earnings after 10 4
interest
Less Tax @ 50% 5 2
Earnings after int. 5 2
& tax or earnings
available to equity
shareholders
Earnings per share 5/100 2/50
=.05 Rs .04 Rs.

Working notes
Solid ltd- EBIT 100 x10%=10
Sound ltd- Ebit -100x10%=10
Calculation of interest
Sound ltd – 50 x 12% =6

Home work -do sum – no . 8 & 9 page no.6.51 , 6.52

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