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CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision

Asha Ltd needs Rs 10,00,000 of new funds. Plan A: issue 10,000 equity shares of Rs 100 each. Plan B: raise 10% debt. Existing capital is 20,000 equity shares and no debt. Tax rate is 30%. Ignoring other factors, the indifference EBIT between the two plans is:

The indifference EBIT is Rs 3,00,000. Equating EBIT/30,000 with (EBIT minus Rs 1,00,000 interest)/20,000 gives that value, and at it both plans give pre-tax EPS of Rs 10, so EPS is identical under either plan.

  1. ARs 3,00,000Correct
  2. BRs 2,00,000
  3. CRs 1,00,000
  4. DRs 6,00,000

Explanation

Plan A shares = 30,000; Plan B shares = 20,000, interest = Rs 1,00,000. Equate (E)(0.7)/30,000 = (E-1,00,000)(0.7)/20,000, giving 20,000E = 30,000E - 3,00,00,00,000/1... so 30,000(E-1,00,000)=20,000E, 10,000E=3,00,00,000... simplifying gives E = Rs 3,00,000. Check: A: 3,00,000/30,000 = 10; B: 2,00,000/20,000 = 10.

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