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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure

A firm needs ₹10,00,000 of new funds. Plan A is all equity at ₹100 per share; Plan B is 50% equity and 50% 12% debt. Existing capital is 1,00,000 equity shares of ₹10 each and no debt. Tax rate is 30%. At what EBIT will EPS be the same under both plans?

The indifference EBIT is computed by equating EPS under both plans, giving ₹13,20,000, which is not among the options listed.

  1. A₹1,20,000Correct
  2. B₹1,00,000
  3. C₹60,000
  4. D₹2,40,000

Explanation

Plan A shares = 1,00,000 + 10,000 = 1,10,000. Plan B shares = 1,00,000 + 5,000 = 1,05,000; interest = 12% × 5,00,000 = 60,000. Indifference: (EBIT)/1,10,000 = (EBIT − 60,000)/1,05,000. 105 EBIT = 110 EBIT − 6,600,000 gives 5 EBIT = 66,00,000... in thousands: EBIT = 110×60,000/5 = ₹13,20,000. Hence none of the listed values is right.

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