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

Kiran Ltd needs ₹50,00,000 and is comparing two plans. Plan A: issue 5,00,000 equity shares at ₹10 each. Plan B: issue 2,50,000 equity shares at ₹10 (₹25,00,000) and ₹25,00,000 of 12% debentures. Existing capital: 5,00,000 equity shares of ₹10 each, no debt. Tax rate is 25%. At what EBIT are the EPS under both plans equal (indifference point)?

The indifference EBIT equals ₹12,00,000 by equating EPS of both plans, so none of the listed values matches.

  1. A₹6,00,000Correct
  2. B₹3,00,000
  3. C₹4,50,000
  4. D₹9,00,000

Explanation

Plan A shares = 10,00,000; Plan B shares = 7,50,000 with interest ₹3,00,000. Equate (EBIT)(0.75)/10,00,000 = (EBIT-3,00,000)(0.75)/7,50,000. Tax cancels: 7.5 EBIT = 10 EBIT - 30,00,000 gives 2.5 EBIT = 30,00,000, so EBIT = ₹12,00,000. Recheck: EBIT/10 = (EBIT-3)/7.5 in lakhs gives 7.5E = 10E - 30, E = 12 lakh. Hence the correct indifference EBIT is ₹12,00,000, which is not listed as a value derived from the given options.

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