Company X is looking for different financial plans with stock value Rs.10/-, preferred stock Rs.90 (par value), dividends 12%, tax rate = 28%, long term bond value is Rs.1200/- (12 year bond) at 9% rate.

Question

Company X is looking for different financial plans with stock value Rs.10/-, preferred stock Rs.90 (par value), dividends 12%, tax rate = 28%, long term bond value is Rs.1200/- (12 year bond) at 9% rate.

Banking & FinanceFinance ManagementGrowth & Empowerment

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	Plan A	Plan B
Common stock	Rs. 2000000	Rs.500000
Preferred stock	Rs.150000	Rs.90000
Long term debt	Rs.250000	Rs.8000000

Using EBIT-EPS approach, calculate EBIT.

Solution

The solution is given below −

            (EBIT – In(a)) (1-T) – Pd(a) / OSa = (EBIT – In(b)) (1-T) – Pd(b)) / OSb

L.H.S.

EBIT = Earnings before interest and tax,

In(a) = 250000 * 9% = 22500

T = 28%

Pd(a) = 150000 * 12% = 18000

OSa = 2000000/10 = 200000

R.H.S.

EBIT = Earnings before interest and tax,

In(b) = 8000000 * 9% = 720000

T = 28%

Pd(b) = 90000 * 12% = 10800

OSb = 500000/10 = 50000

         (EBIT – In(a)) (1-T) – Pd(a) / OSa = (EBIT – In(b)) (1-T) – Pd(b)) / OSb
      (EBIT – 22500)(1-0.28) – 18000 / 200000 = (EBIT – 720000) (1-0.28) – 10800 /50000
         (EBIT – 22500)*0.72 -18000 = 4{(EBIT -720000)*0.72 – 10800}
            0.72EBIT – 34200 = 2.88EBIT – 518400
                  2.16EBIT = 484200
                  EBIT = 224166.67/-

Mandalika

Published on 25-Sep-2020 18:03:07

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