CS Executive · Corporate Accounting and Financial Management · Capital Structure
Mehta Ltd compares Plan X: 60,000 equity shares only, with Plan Y: 40,000 equity shares plus 12% debentures of Rs 5,00,000. Tax rate is 30%. Interest under Plan Y is Rs 60,000. The indifference point EBIT is:
Tax is the same proportion under both plans so it cancels. Equating EBIT/60,000 with (EBIT minus 60,000)/40,000 gives 40 EBIT = 60 EBIT minus 36,00,000, so the indifference EBIT is Rs 1,80,000.
- ARs 1,20,000
- BRs 1,80,000Correct
- CRs 1,50,000
- DRs 2,40,000
Explanation
Equate (EBIT)(0.7)/60,000 = (EBIT-60,000)(0.7)/40,000. Tax cancels. 40,000 EBIT = 60,000 EBIT - 36,00,00,000/100... i.e. 40 EBIT = 60(EBIT-60,000), so 20 EBIT = 36,00,000, EBIT = 1,80,000. Option A forgets to scale correctly by shares.
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