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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages

Meridian Foods needs Rs 10,00,000 of new capital. Plan A raises all of it by issuing 1,00,000 equity shares of Rs 10 each. Plan B raises Rs 5,00,000 by issuing 50,000 equity shares of Rs 10 each and Rs 5,00,000 through 12% debentures. Ignoring tax, at what EBIT will EPS be the same under both plans?

The indifference EBIT is Rs 1,20,000. Setting E/1,00,000 equal to (E - 60,000)/50,000 gives E = 1,20,000. At this EBIT both plans give an EPS of Rs 1.20. Above it, the debt plan gives a higher EPS.

  1. ARs 60,000
  2. BRs 1,20,000Correct
  3. CRs 1,80,000
  4. DRs 2,40,000

Explanation

Interest under Plan B = 12% of 5,00,000 = Rs 60,000. Equate EPS: E/1,00,000 = (E - 60,000)/50,000, so E = 2E - 1,20,000 and E = Rs 1,20,000. Check: 1,20,000/1,00,000 = 1.2 and 60,000/50,000 = 1.2. Rs 60,000 is just the interest and ignores the difference in share counts.

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