CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision
Asha Textiles has EBIT of ₹6,00,000 and its capital includes 10% debentures of ₹10,00,000. Its tax rate is 25%. Using the trading-on-equity idea, what is the profit after tax available to equity shareholders if there is no preference capital?
The profit available to equity shareholders is ₹3,75,000. Interest on debentures is ₹1,00,000, leaving EBT of ₹5,00,000. Tax at 25 percent is ₹1,25,000, so PAT is ₹3,75,000. Ignoring interest would wrongly give ₹4,50,000.
- A₹3,75,000Correct
- B₹4,50,000
- C₹3,00,000
- D₹5,00,000
Explanation
Interest = 10% of ₹10,00,000 = ₹1,00,000. EBT = 6,00,000 − 1,00,000 = ₹5,00,000. Tax at 25% = ₹1,25,000, so PAT = ₹3,75,000. The ₹4,50,000 option ignores interest and only deducts tax, which is wrong.
Did you get it right without looking?
One question tells you little. A timed set on Operational Approach to Financial Decision shows your real accuracy, how long you take and where you lose marks.
More Operational Approach to Financial Decision questions
- Verma Foods Ltd has sales of Rs 10,00,000, variable costs of Rs 6,00,000 and fixed costs of Rs 2,00,000. What is its margin of safety as a p…
- Iyer Motors Ltd has a P/V ratio of 40% and fixed costs of Rs 4,00,000. Management wants a profit of Rs 2,00,000. What sales value is require…
- Sunrise Traders Ltd. has sales of ₹10,00,000, variable costs of ₹6,00,000 and fixed operating costs of ₹2,00,000. What is its degree of oper…
- In EBIT-EPS analysis, the indifference point between two financing plans is best described as the level of EBIT at which:
- Gupta Foods has a P/V ratio of 40% and fixed costs of Rs 6,00,000. Sales needed to earn a profit of Rs 2,00,000 are:
- A firm has a degree of operating leverage (DOL) of 3 at its current sales level. If sales rise by 8% and fixed operating costs stay unchange…