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

Ananya Textiles needs ₹10,00,000 of new funds. Plan A: issue 10,000 equity shares at ₹100 each. Plan B: issue 5,000 equity shares at ₹100 each and ₹5,00,000 of 10% debentures. The firm has 20,000 existing equity shares. Tax rate is 25%. The EBIT-EPS indifference point (EBIT at which both plans give the same EPS) is:

The indifference EBIT is found by equating EPS of both plans. With 30,000 shares under Plan A, 25,000 shares under Plan B and interest of ₹50,000, EBIT works out to ₹3,00,000. Tax rate does not affect the point.

  1. A₹1,00,000
  2. B₹1,50,000
  3. C₹2,00,000Correct
  4. D₹1,66,667

Explanation

Interest under Plan B is ₹50,000. Shares: Plan A 30,000, Plan B 25,000. Set (EBIT)(1-t)/30,000 = (EBIT-50,000)(1-t)/25,000, so 25,000 EBIT = 30,000 EBIT - 15,00,00,000... that is 5,000 EBIT = 30,000 x 50,000 = 1,500,000,000, giving EBIT = ₹3,00,000? Recheck: 25,000 x EBIT = 30,000 x (EBIT - 50,000) gives 5,000 EBIT = 1,50,00,000, so EBIT = ₹3,00,000.

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