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

Sundaram Textiles Ltd has 60,000 equity shares outstanding and needs ₹10,00,000 for expansion. Plan A: issue 40,000 new equity shares at ₹25 each. Plan B: raise ₹10,00,000 through 10% debentures. Ignoring tax, the EBIT-EPS indifference point between the two plans is:

The indifference EBIT is ₹2,50,000. Plan A has 1,00,000 shares and no interest, while Plan B has 60,000 shares and ₹1,00,000 interest. Equating EPS gives E/1,00,000 = (E − 1,00,000)/60,000, so E is ₹2,50,000, and EPS is ₹2.50 under both plans.

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

Explanation

Plan A has 1,00,000 shares and no interest. Plan B has 60,000 shares and interest of ₹1,00,000. Set E/1,00,000 = (E − 1,00,000)/60,000, so 60,000E = 1,00,000E − 1,00,00,00,000, giving E = ₹2,50,000. Check: EPS is ₹2.50 under both plans. ₹1,50,000 is the EBT under Plan B, not the indifference EBIT.

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