CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis
Sundaram Textiles Ltd has EBIT of ₹8,00,000. Under Plan A (all equity) it would have 2,00,000 shares. Under Plan B it would raise part funds through 10% debt of ₹10,00,000 and have 1,00,000 shares. The tax rate is 25%. What is the EPS under Plan B?
EPS under Plan B is ₹5.25. Interest of ₹1,00,000 reduces EBIT of ₹8,00,000 to EBT of ₹7,00,000. After 25% tax, earnings are ₹5,25,000, and dividing by 1,00,000 shares gives ₹5.25 per share.
- A₹4.50
- B₹5.25Correct
- C₹7.00
- D₹3.00
Explanation
Interest = 10% of ₹10,00,000 = ₹1,00,000. EBT = 8,00,000 - 1,00,000 = 7,00,000. Tax at 25% = 1,75,000, so EAT = 5,25,000. EPS = 5,25,000 / 1,00,000 = ₹5.25. The option ₹7.00 ignores tax, and ₹4.50 is wrong because it subtracts interest twice.
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