14857929 ebiteps analysis

7/27/2019 14857929 Ebiteps Analysis

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EBIT/EPS

ANALYSIS


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EBIT-EPSEBIT-EPS

analysisanalysis is anapproach whichhelps indesigning the

optimum capitalstructure forthe company orthe firm.

To designvarious

alternatives ofdebt, equity andpreference

shares in orderto maximize theEPS at a givenlevel of EBIT.


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It examines how different capitalstructures affect earnings availableto shareholders (Earning Per

Share).It is the analysis of the effect offinancing alternatives on earningsper share.

To design the capital structure ofthe firm in such a way so as tominimize the cost of capital.

EBIT-EPS anal sis is a method to


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Sales : xxxxx(-)V.C : xxx

=Contribution : xxxxx(-)F.C : xxxx

=EBIT {Earning Before Interest

and Taxes}


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EBIT : xxxxx(-)INTERSET : xxx

=EBT : xxxxx(-)TAX : xx

=Earning for ESH : xxxxx

() No. of E.S : xxx

= EPS {Earning Per Share}xxx


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Q: The present capital structure of Gupta Co. ltd. is:

4000, 5% Debentures of Rs 100 each Rs 4,00,000

2000, 8% P. Shares of Rs 100 each Rs 2,00,0004000, Equity shares of Rs 100 each Rs 4,00,000

Rs 10,00,000

The present earning of the company before interest & taxes are

10% of the invested capital every year. The company is in need of

Rs 2,00,000 for purchasing a new equipment and it is estimated

that additional investment will also produce 10% earning before

interest & taxes every year.

The company has asked your advice as to whether the requisite

amount be obtained in the form of 5% Debenture or 8% P. SharesOr equity shares of Rs 100 each to be issued at par. Examine the

problem in all its bearing and advice firm if the Corporate tax rate

is 50%.


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STATEMENT SHOWING THE EPS UNDER EXISTING &PROPOSED ALTERNATIVE

Particulars Present

iDebenture

iiP. Share

iiiEq. Share

EBIT(-)Interest

1,00,00020,000

1,20,00030,000

1,20,00020,000

1,20,00020,000

EBT(-)Tax

50%

80,00040,000

90,00045,000

1,00,00050,000

1,00,00050,000

EAT(-)P.Dividend

40,00016,000

45,00016,000

50,00032,000

50,00016,000

ESH

() No. ofEquityShares

24,000

4,000

29,000

4,000

18,000

4,000

34,000

6,000

EPSChange inEPS

Rs 6.00-

Rs 7.25+1.25

Rs 4.50-1.50

Rs 5.67-0.33

ALTENATIVES


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The EBIT level at which the EPS is thesame for two alternative financial planis referred to as the indifferencepoint/level.

Financial break even point obtained bya company at a given level of EBIT forwhich the firms EPS is zero.

If EBIT is less than financial breakeven point, then the EPS is negative.

If EBIT is more than the financial breakeven point, then more and more fixed

cost financing option can be used by a


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APPROACHES TO INDIFFERENCEANALYSIS

Graphical approachAlgebric approach


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BREAKEVENBREAKEVEN

EBITEBITEPSEPS

EBITEBIT

$1m $2m $3m $4m$1m $2m $3m $4m

Debt + EquityDebt + Equity

alternativealternative

EquityEquity

AlternativeAlternative

00

33

22

11

Indifference pointIndifference point


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Algebric approachBreakeven analysis

For newly formed company:

Equity vs. Debenture =

Equity vs. P. Shares =

Equity vs. P. Shares vs. Debenture=

For an existing company: {When debenture areoutstanding}

X(1-T)N1 =

(X-I)(1-T)N2

X(1-T)N1 = X(1-I)-PN3X(1-T)

N1 =(X-1)(1-I)-P

N4

(X-1)(1-T)N1 =

(X-I1)(1-T)-PN4


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Where,

X = EBITN1 = No. of Eq. shares outstanding if any eq. shares are

issuedN2 = No. of Eq. shares outstanding if both eq. shares &

debt are issuedN3 = No. of Eq. shares outstanding if both eq. & pref.

shares are issuedN4 = No. of Eq. shares outstanding if both pref. shares &

debt are issuedI = Interest on debenturesP = Pref. DividendT = Corporate Tax Rate


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REFERENCES:

KHAN, M.Y. & JAIN, P.K.; FINANCIALMANAGEMENT (TATA MC GRAW- HILLPUBLISHING CO. LTD.),1995

PANDEY, I.M.; FINANCIAL MANAGEMENT(VIKAS PUBLISHING HOUSE LTD.), 2007

SAHNI, D.; BUSINESS FINANCE (KEDAR

NATH RAM NATH), 2009


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14857929 ebiteps analysis

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