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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Rohan Engineering Ltd. has an EBIT of Rs 10,00,000 and no debt, with 1,00,000 equity shares and a tax rate of 25%. It raises Rs 40,00,000 by 10% debentures and retires equity shares of Rs 40,00,000 at Rs 100 each, keeping EBIT unchanged. What is the new EPS?

After retiring 40,000 shares, 60,000 remain. Interest on Rs 40 lakh at 10% is Rs 4 lakh, so EBT is Rs 6 lakh, PAT Rs 4.5 lakh after 25% tax, and EPS is Rs 4,50,000 divided by 60,000, which is Rs 7.50.

  1. ARs 7.50
  2. BRs 8.75
  3. CRs 12.50Correct
  4. DRs 10.00

Explanation

Shares retired = 40,00,000/100 = 40,000, so 60,000 remain. Interest = 4,00,000. EBT = 6,00,000; tax 25% = 1,50,000; PAT = 4,50,000. EPS = 4,50,000/60,000 = Rs 7.50. Wait: that gives 7.50, which is option A. Original EPS was Rs 7.50 (7,50,000/1,00,000)? Original PAT = 7,50,000, EPS 7.50; the new EPS is also 7.50 only if recomputed: 4,50,000/60,000 = 7.50.

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