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This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 October 2011 The operating income of a textile firm amt to Rs. 2 lacs.it pays 50% tax on its income.its capital structure consists of the following:
14% Debenture Rs. 5 lacs
15% pre.share Rs. 1 lacs
Equity share Rs. 4 lacs
1)calculate the firm's EPS
2)calculate the % change in EPS associated with 30% change(both increase and decrease)in EBIT
3)calculate the degree of Financial leverage at the current level of EBIT
4)What additional data do you need to compile operating as well as combined leverage?

CA Ankit Verma

CA Ankit Verma (Expert)
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08 October 2011 (1) Calculation of EPS-
(assuming Face value per equity share = Rs. 100)

Interest on debentures = Rs. 70000/-
Preference Dividend = Rs. 15000/-
Earning after Tax = Rs. 100000
Therefore,

EPS = [EAT - Int on debenture - Pref. Dividend] / No. of Equity Shares

= [100000 - 70000 - 15000]/4000

= 15000/4000

EPS = Rs. 3.75 per share

(2) 30% increase/decrease in operating income will lead to 200% increase & decrease in EPS

(3) DFL = EBT/EBIT

= (200000 - 70000) / 200000

= 0.65

(4) Sales proceeds is required to calculate DOL & DCL.

DOL = EBIT / Sales

DCL = DOL x DFL

Message likes : 2 times

CA Pushpendra Gaur

CA Pushpendra Gaur (Expert)
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11 October 2011 In my opinion,

Since the word operating income is used
EBT = Operating Income - Debenture Interest
EBT = 2,00,000 - 70,000
EBT = 1,30,000

EAT = 1,30,000 - 65,000(taxes)
EAT = 65,000
Divisible profit = 65,000-15000(pref dividend)
Divisible profit = Rs 50,000

EPS = 50,000 / 40,000 shares
(face value of a share to be assumed of Rs 10 only)

EPS = Rs. 1.25

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