Problems in EBIT EPS Analysis

1. A textile company has EBIT of Rs 1, 60,000. Its capital structure

consists of the following securities. 10 % Debentures Rs 5,00,000 12 % Preference shares 1,00,000 Equity shares of Rs 100 each 4,00,000 The company is in the 35 % per cent bracket a. Determine the EPS b. Determine the percentage change in EPS associated with 30 percent increase and 30 % decrease in EBIT c. Determine the degree of financial leverage.
2. The capital structure of the Progressive corporation Ltd consists of an

ordinary share capital of Rs 10,00,000 (shares of Rs 100 face value) and Rs 10,00,000 of 10 % debentures. The unit sales increased by 20 % from 1,00,000 units to Rs 1,20,000, the selling price is Rs 10 per unit, variable costs amount to Rs 6 per unit and fixed expenses amount to Rs 2,00,000. The income tax rate is assumed to be 35 % You are required to calculate the following 1. The percentage increase in EPS 2. The degree of financial leverage at 1,00,000 units and 1,20,000 units 3. The degree of operating leverage at 1,00,000 units and 1,20,000 units 3. Excel limited is considering three financing plans. The key information is as follows Plans A B C Equity % 100 50 50 Debt % 50 Preference % 50

Additional information a. Cost of debt 8 percent and cost of preference shares 8 percent b. Tax rate 35 % c. Equity shares of the face value of Rs 10 each will be issued at a premium of Rs 10 per share. d. Expected EBIT Rs 80,000

4. Multitech plans to expand assets by 50 percent. To finance the expansion it is choosing between a straight 6 % debt issue and equity issue. Its current balance sheet and income statement are shown below. Balance Sheet of Multitech as on March 31 5 % debt Rs 4,00,000 equity shares 10,00,000 ( Rs 10 per share) Earned surplus 6,00,000 20,00,000 Total assets Rs 20,00,000 ------------20,00,000

Income statement for the year ended March 31 Sales Total costs EBIT Less: Interest EBT Less taxes Net income Rs 60,00,000 53,80,000 6,20,000 20,000 6,00,000 2,10,000 3,90,000

If company finances the proposed expansion with debt, the rate on the incremental debt will be 6 % and if expansion is financed by equity, the new shares can be sold at Rs 33.33 a. Assuming that net income before interest and taxes (EBIT) is 10 % on sales, calculate EPS at assumed sales of Rs 20 lakhs, Rs 40 lakhs, Rs 80 lakhs and Rs 100 lakh under the alternative forms of financing the expansion program ( assume no fixed cost)

Particulars EBIT Less interest EBT Less tax Amount available to equity holders No of equity EPS

Rs 20 lakh Debt Equity

Rs 40 lakh Debt Equity

Rs 80 lakh Debt Equity

Rs 100 lakh Debt Equity

5. A company is considering lowering the selling price of its product. The following information is available on the costs of producing and the income from selling its product. Units sold Unit sales price Variable cost Fixed cost Net operating income 3,00,000 Rs 10 6 6,00,000 6,00,000

The management of has asked you to prepare a table indicating the percentage increase in volume necessary to maintain a net operating income at the current level on product with decrease in price of 10 percent and 20 percent, assuming other costs remain constant. 6. A company is considering methods of financing its establishment. Initially Rs 2,00,000 will be needed. The company is considering two proposals for the purpose. 1. issue 15 % debentures of Rs 1,00,000 and issue 1000 equity shares of Rs 100 each 2. issue 2000 shares of Rs 100 each. The corporate tax rate is 35 %. Suggest the best plan by assuming the level of EBIT is a. Rs 30,000 b. Rs 40,000 c. Rs 80,000