CA Intermediate Exam > CA Intermediate Notes > Financial Management Model Test Paper - 8 (Answers)
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Page 1
ANSWERS OF MODEL TEST PAPER 8
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. i. (D) ` 3.3779
ii. (B) ` 8.3655
iii. (A) ` 72.28
iv. (C) ` 45.79
v. (B) ` 54.33
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the
end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4
th
Year.
C. Add the values of A and B above.
(A)
Year D1 = D0(1+g)
PV Discount
Factor @ 12%
PV in
`
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
(A) Total PV of Expected Dividend ` 8.3655
???? 4
=
???? 5
???? ???? - ???? =
???? 4
( 1 + ???? )
???? ???? - ???? =
3. 3 7 7 9( 1 + 7 %)
1 2 % - 7 %
= ` 72.28
(B) PV of share at the end of 4
th
Year = ` 72.28 x 0.636 =` 45.97
(C) Market Price of shares = ` 8.3655 + ` 45.97=` 54.33
2. (B) 6.16%
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Let V be the total value of the firm, then Debt is equal to 1.5/(1+1.5) times
the value of the firm and Equity is equal to 1/(1+1.5) times the value of
the firm.
So, D/V = 1.5/(1+1.5) = 0.6 and E/V = 1/(1+1.5) = 0.4
575
Page 2
ANSWERS OF MODEL TEST PAPER 8
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. i. (D) ` 3.3779
ii. (B) ` 8.3655
iii. (A) ` 72.28
iv. (C) ` 45.79
v. (B) ` 54.33
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the
end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4
th
Year.
C. Add the values of A and B above.
(A)
Year D1 = D0(1+g)
PV Discount
Factor @ 12%
PV in
`
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
(A) Total PV of Expected Dividend ` 8.3655
???? 4
=
???? 5
???? ???? - ???? =
???? 4
( 1 + ???? )
???? ???? - ???? =
3. 3 7 7 9( 1 + 7 %)
1 2 % - 7 %
= ` 72.28
(B) PV of share at the end of 4
th
Year = ` 72.28 x 0.636 =` 45.97
(C) Market Price of shares = ` 8.3655 + ` 45.97=` 54.33
2. (B) 6.16%
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Let V be the total value of the firm, then Debt is equal to 1.5/(1+1.5) times
the value of the firm and Equity is equal to 1/(1+1.5) times the value of
the firm.
So, D/V = 1.5/(1+1.5) = 0.6 and E/V = 1/(1+1.5) = 0.4
575
WACC = 0.4 × 10% + 0.6 × 6% × (1 - 40%) = 4% + 2.16% = 6.16%
Therefore, the company's weighted average cost of capital is 6.16%.
3. (A) 1.11
EBIT = 3,00,000 x (3-1) – 3,50,000 = 2,50,000,
PBT = 2,50,000 – 25,000 – 2,25,000
FL = 2,50,000/2,25,000 = 1.11
4. (C) both automatic and approval route
PART II – Descriptive Questions
1. (a) Calculation of Cost of Preference Shares (Kp)
Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000
Floatation Cost = 40,000 x 2 = ` 80,000
Net Proceeds (NP) = 42,00,000 – 80,000 = 41,20,000
Redemption Value (RV)= 40,000 x 110 = 44,00,000
Cost of Redeemable Preference Shares =
+
+
RV NP
2
PD (RV - NP) / N
Kp =
+
+
4,80,000 (44,00,000 - 41,20,000) / 10
44,00,000 41,20,000
2
=
+ 4,80,000 (2,80,000) / 10
85,20,000 / 2
=
+ 4,80,000 28,000
42,60,000
=
42,60,000
5,08,000
= 0.1192
Kp = 11.92%
(Note: Kp may be computed alternatively by taking the RV and NP for
one unit of preference shares. Final figure would remain unchanged).
(b) Calculation of Net Cash flow
Contribution = (3.00 – 1.75) × 50,000 = ` 62,500
Fixed costs = 40,000 – [(1,25,000 – 30,000)/5] = ` 21,000
Year Capital
(`)
Contribution
(`)
Fixed
costs (`)
Adverts
(`)
Net cash
flow (`)
0 (1,00,000) - - - (1,00,000)
1 (25,000) 62,500 (21,000) (10,000) 6,500
2 - 62,500 (21,000) (15,000) 26,500
3 - 62,500 (21,000) - 41,500
576
Page 3
ANSWERS OF MODEL TEST PAPER 8
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. i. (D) ` 3.3779
ii. (B) ` 8.3655
iii. (A) ` 72.28
iv. (C) ` 45.79
v. (B) ` 54.33
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the
end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4
th
Year.
C. Add the values of A and B above.
(A)
Year D1 = D0(1+g)
PV Discount
Factor @ 12%
PV in
`
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
(A) Total PV of Expected Dividend ` 8.3655
???? 4
=
???? 5
???? ???? - ???? =
???? 4
( 1 + ???? )
???? ???? - ???? =
3. 3 7 7 9( 1 + 7 %)
1 2 % - 7 %
= ` 72.28
(B) PV of share at the end of 4
th
Year = ` 72.28 x 0.636 =` 45.97
(C) Market Price of shares = ` 8.3655 + ` 45.97=` 54.33
2. (B) 6.16%
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Let V be the total value of the firm, then Debt is equal to 1.5/(1+1.5) times
the value of the firm and Equity is equal to 1/(1+1.5) times the value of
the firm.
So, D/V = 1.5/(1+1.5) = 0.6 and E/V = 1/(1+1.5) = 0.4
575
WACC = 0.4 × 10% + 0.6 × 6% × (1 - 40%) = 4% + 2.16% = 6.16%
Therefore, the company's weighted average cost of capital is 6.16%.
3. (A) 1.11
EBIT = 3,00,000 x (3-1) – 3,50,000 = 2,50,000,
PBT = 2,50,000 – 25,000 – 2,25,000
FL = 2,50,000/2,25,000 = 1.11
4. (C) both automatic and approval route
PART II – Descriptive Questions
1. (a) Calculation of Cost of Preference Shares (Kp)
Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000
Floatation Cost = 40,000 x 2 = ` 80,000
Net Proceeds (NP) = 42,00,000 – 80,000 = 41,20,000
Redemption Value (RV)= 40,000 x 110 = 44,00,000
Cost of Redeemable Preference Shares =
+
+
RV NP
2
PD (RV - NP) / N
Kp =
+
+
4,80,000 (44,00,000 - 41,20,000) / 10
44,00,000 41,20,000
2
=
+ 4,80,000 (2,80,000) / 10
85,20,000 / 2
=
+ 4,80,000 28,000
42,60,000
=
42,60,000
5,08,000
= 0.1192
Kp = 11.92%
(Note: Kp may be computed alternatively by taking the RV and NP for
one unit of preference shares. Final figure would remain unchanged).
(b) Calculation of Net Cash flow
Contribution = (3.00 – 1.75) × 50,000 = ` 62,500
Fixed costs = 40,000 – [(1,25,000 – 30,000)/5] = ` 21,000
Year Capital
(`)
Contribution
(`)
Fixed
costs (`)
Adverts
(`)
Net cash
flow (`)
0 (1,00,000) - - - (1,00,000)
1 (25,000) 62,500 (21,000) (10,000) 6,500
2 - 62,500 (21,000) (15,000) 26,500
3 - 62,500 (21,000) - 41,500
576
4 - 62,500 (21,000) - 41,500
5 30,000 62,500 (21,000) - 71,500
Calculation of Net Present Value
Year Net cash flow
(`)
10% discount factor Present value
(`)
0 (1,00,000) 1.000 (1,00,000)
1 6,500 0.909 5,909
2 26,500 0.826 21,889
3 41,500 0.751 31,167
4 41,500 0.683 28,345
5 71,500 0.621 44,402
NPV 31,712
The net present value of the project is ` 31,712.
(c)
(`)
Sales 24,00,000
Less: Variable cost 12,00,000
Contribution 12,00,000
Less: Fixed cost 10,00,000
EBIT 2,00,000
Less: Interest 1,00,000
EBT 1,00,000
Less: Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5
(a) Operating Leverage
`
`
= =
12,00,000
6 times
2,00,000
(b) Financial Leverage
`
`
= =
2,00,000
2 times
1,00,000
(c) Combined Leverage = OL × FL = 6 × 2 = 12 times.
(d) ROI
`
`
= ×=
50,000
100 5%
10,00,000
Here ROI is calculated as ROE i.e.
EAT-Pref.Dividend
Equityshareholders'fund
(e) Operating Leverage = 6
? EBIT
6 =
0.25
577
Page 4
ANSWERS OF MODEL TEST PAPER 8
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. i. (D) ` 3.3779
ii. (B) ` 8.3655
iii. (A) ` 72.28
iv. (C) ` 45.79
v. (B) ` 54.33
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the
end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4
th
Year.
C. Add the values of A and B above.
(A)
Year D1 = D0(1+g)
PV Discount
Factor @ 12%
PV in
`
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
(A) Total PV of Expected Dividend ` 8.3655
???? 4
=
???? 5
???? ???? - ???? =
???? 4
( 1 + ???? )
???? ???? - ???? =
3. 3 7 7 9( 1 + 7 %)
1 2 % - 7 %
= ` 72.28
(B) PV of share at the end of 4
th
Year = ` 72.28 x 0.636 =` 45.97
(C) Market Price of shares = ` 8.3655 + ` 45.97=` 54.33
2. (B) 6.16%
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Let V be the total value of the firm, then Debt is equal to 1.5/(1+1.5) times
the value of the firm and Equity is equal to 1/(1+1.5) times the value of
the firm.
So, D/V = 1.5/(1+1.5) = 0.6 and E/V = 1/(1+1.5) = 0.4
575
WACC = 0.4 × 10% + 0.6 × 6% × (1 - 40%) = 4% + 2.16% = 6.16%
Therefore, the company's weighted average cost of capital is 6.16%.
3. (A) 1.11
EBIT = 3,00,000 x (3-1) – 3,50,000 = 2,50,000,
PBT = 2,50,000 – 25,000 – 2,25,000
FL = 2,50,000/2,25,000 = 1.11
4. (C) both automatic and approval route
PART II – Descriptive Questions
1. (a) Calculation of Cost of Preference Shares (Kp)
Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000
Floatation Cost = 40,000 x 2 = ` 80,000
Net Proceeds (NP) = 42,00,000 – 80,000 = 41,20,000
Redemption Value (RV)= 40,000 x 110 = 44,00,000
Cost of Redeemable Preference Shares =
+
+
RV NP
2
PD (RV - NP) / N
Kp =
+
+
4,80,000 (44,00,000 - 41,20,000) / 10
44,00,000 41,20,000
2
=
+ 4,80,000 (2,80,000) / 10
85,20,000 / 2
=
+ 4,80,000 28,000
42,60,000
=
42,60,000
5,08,000
= 0.1192
Kp = 11.92%
(Note: Kp may be computed alternatively by taking the RV and NP for
one unit of preference shares. Final figure would remain unchanged).
(b) Calculation of Net Cash flow
Contribution = (3.00 – 1.75) × 50,000 = ` 62,500
Fixed costs = 40,000 – [(1,25,000 – 30,000)/5] = ` 21,000
Year Capital
(`)
Contribution
(`)
Fixed
costs (`)
Adverts
(`)
Net cash
flow (`)
0 (1,00,000) - - - (1,00,000)
1 (25,000) 62,500 (21,000) (10,000) 6,500
2 - 62,500 (21,000) (15,000) 26,500
3 - 62,500 (21,000) - 41,500
576
4 - 62,500 (21,000) - 41,500
5 30,000 62,500 (21,000) - 71,500
Calculation of Net Present Value
Year Net cash flow
(`)
10% discount factor Present value
(`)
0 (1,00,000) 1.000 (1,00,000)
1 6,500 0.909 5,909
2 26,500 0.826 21,889
3 41,500 0.751 31,167
4 41,500 0.683 28,345
5 71,500 0.621 44,402
NPV 31,712
The net present value of the project is ` 31,712.
(c)
(`)
Sales 24,00,000
Less: Variable cost 12,00,000
Contribution 12,00,000
Less: Fixed cost 10,00,000
EBIT 2,00,000
Less: Interest 1,00,000
EBT 1,00,000
Less: Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5
(a) Operating Leverage
`
`
= =
12,00,000
6 times
2,00,000
(b) Financial Leverage
`
`
= =
2,00,000
2 times
1,00,000
(c) Combined Leverage = OL × FL = 6 × 2 = 12 times.
(d) ROI
`
`
= ×=
50,000
100 5%
10,00,000
Here ROI is calculated as ROE i.e.
EAT-Pref.Dividend
Equityshareholders'fund
(e) Operating Leverage = 6
? EBIT
6 =
0.25
577
6 1
? EBIT 1.5
4
×
= =
Increase in EBIT = ` 2,00,000 × 1.5
= ` 3,00,000
New EBIT = ` 5,00,000
2. Working Notes:
1. Raw Material Storage Period (R)
=
Average Stock of Raw Material
Annual Consumption of Raw Material
? 365
=
45,000 + 65,356
2
×365
3,79,644
``
`
= 53 days.
Annual Consumption of Raw Material = Opening Stock + Purchases-
Closing Stock
= ` 45,000 + ` 4,00,000 – ` 65,356
= ` 3,79,644
2. Work-in-Progress (WIP) Conversion Period (W)
WIP Conversion Period =
Average Stock of WIP
365
Annual Cost of Pr oduction
?
=
35,000+ 51,300
2
×365
7,50,000
` `
`
= 21 days
3. Finished Stock Storage Period (F)
=
Average Stock of Finished Goods
× 365
Cost of Goods Sold
=
65,178
365
9,15,000
?
`
`
= 26 days.
Average Stock =
60,181 + 70,175
2
``
= ` 65,178.
4. Debtors Collection Period (D)
=
Average Debtors
× 365
Annual Credit Sales
=
1,23,561.50
365
11,00,000
?
`
`
578
Page 5
ANSWERS OF MODEL TEST PAPER 8
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. i. (D) ` 3.3779
ii. (B) ` 8.3655
iii. (A) ` 72.28
iv. (C) ` 45.79
v. (B) ` 54.33
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the
end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4
th
Year.
C. Add the values of A and B above.
(A)
Year D1 = D0(1+g)
PV Discount
Factor @ 12%
PV in
`
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
(A) Total PV of Expected Dividend ` 8.3655
???? 4
=
???? 5
???? ???? - ???? =
???? 4
( 1 + ???? )
???? ???? - ???? =
3. 3 7 7 9( 1 + 7 %)
1 2 % - 7 %
= ` 72.28
(B) PV of share at the end of 4
th
Year = ` 72.28 x 0.636 =` 45.97
(C) Market Price of shares = ` 8.3655 + ` 45.97=` 54.33
2. (B) 6.16%
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Let V be the total value of the firm, then Debt is equal to 1.5/(1+1.5) times
the value of the firm and Equity is equal to 1/(1+1.5) times the value of
the firm.
So, D/V = 1.5/(1+1.5) = 0.6 and E/V = 1/(1+1.5) = 0.4
575
WACC = 0.4 × 10% + 0.6 × 6% × (1 - 40%) = 4% + 2.16% = 6.16%
Therefore, the company's weighted average cost of capital is 6.16%.
3. (A) 1.11
EBIT = 3,00,000 x (3-1) – 3,50,000 = 2,50,000,
PBT = 2,50,000 – 25,000 – 2,25,000
FL = 2,50,000/2,25,000 = 1.11
4. (C) both automatic and approval route
PART II – Descriptive Questions
1. (a) Calculation of Cost of Preference Shares (Kp)
Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000
Floatation Cost = 40,000 x 2 = ` 80,000
Net Proceeds (NP) = 42,00,000 – 80,000 = 41,20,000
Redemption Value (RV)= 40,000 x 110 = 44,00,000
Cost of Redeemable Preference Shares =
+
+
RV NP
2
PD (RV - NP) / N
Kp =
+
+
4,80,000 (44,00,000 - 41,20,000) / 10
44,00,000 41,20,000
2
=
+ 4,80,000 (2,80,000) / 10
85,20,000 / 2
=
+ 4,80,000 28,000
42,60,000
=
42,60,000
5,08,000
= 0.1192
Kp = 11.92%
(Note: Kp may be computed alternatively by taking the RV and NP for
one unit of preference shares. Final figure would remain unchanged).
(b) Calculation of Net Cash flow
Contribution = (3.00 – 1.75) × 50,000 = ` 62,500
Fixed costs = 40,000 – [(1,25,000 – 30,000)/5] = ` 21,000
Year Capital
(`)
Contribution
(`)
Fixed
costs (`)
Adverts
(`)
Net cash
flow (`)
0 (1,00,000) - - - (1,00,000)
1 (25,000) 62,500 (21,000) (10,000) 6,500
2 - 62,500 (21,000) (15,000) 26,500
3 - 62,500 (21,000) - 41,500
576
4 - 62,500 (21,000) - 41,500
5 30,000 62,500 (21,000) - 71,500
Calculation of Net Present Value
Year Net cash flow
(`)
10% discount factor Present value
(`)
0 (1,00,000) 1.000 (1,00,000)
1 6,500 0.909 5,909
2 26,500 0.826 21,889
3 41,500 0.751 31,167
4 41,500 0.683 28,345
5 71,500 0.621 44,402
NPV 31,712
The net present value of the project is ` 31,712.
(c)
(`)
Sales 24,00,000
Less: Variable cost 12,00,000
Contribution 12,00,000
Less: Fixed cost 10,00,000
EBIT 2,00,000
Less: Interest 1,00,000
EBT 1,00,000
Less: Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5
(a) Operating Leverage
`
`
= =
12,00,000
6 times
2,00,000
(b) Financial Leverage
`
`
= =
2,00,000
2 times
1,00,000
(c) Combined Leverage = OL × FL = 6 × 2 = 12 times.
(d) ROI
`
`
= ×=
50,000
100 5%
10,00,000
Here ROI is calculated as ROE i.e.
EAT-Pref.Dividend
Equityshareholders'fund
(e) Operating Leverage = 6
? EBIT
6 =
0.25
577
6 1
? EBIT 1.5
4
×
= =
Increase in EBIT = ` 2,00,000 × 1.5
= ` 3,00,000
New EBIT = ` 5,00,000
2. Working Notes:
1. Raw Material Storage Period (R)
=
Average Stock of Raw Material
Annual Consumption of Raw Material
? 365
=
45,000 + 65,356
2
×365
3,79,644
``
`
= 53 days.
Annual Consumption of Raw Material = Opening Stock + Purchases-
Closing Stock
= ` 45,000 + ` 4,00,000 – ` 65,356
= ` 3,79,644
2. Work-in-Progress (WIP) Conversion Period (W)
WIP Conversion Period =
Average Stock of WIP
365
Annual Cost of Pr oduction
?
=
35,000+ 51,300
2
×365
7,50,000
` `
`
= 21 days
3. Finished Stock Storage Period (F)
=
Average Stock of Finished Goods
× 365
Cost of Goods Sold
=
65,178
365
9,15,000
?
`
`
= 26 days.
Average Stock =
60,181 + 70,175
2
``
= ` 65,178.
4. Debtors Collection Period (D)
=
Average Debtors
× 365
Annual Credit Sales
=
1,23,561.50
365
11,00,000
?
`
`
578
= 41 days
Average debtors =
+
1,12,123 1,35,000
1,23,561.50
2
?
``
`
5. Creditors Payment Period (C)
=
Average Creditors
× 365
Annual Net Credit Purchases
=
+ 50,079 70,469
2
4,00,000
??
? ?
?
?
? ?
??
``
`
× 365
= 55 days
(i) Operating Cycle Period
= R + W + F+ D - C
= 53 + 21 + 26 + 41 - 55
= 86 days
(ii) Number of Operating Cycles in the Year
=
Period Cycle Operating
365
=
86
365
= 4.244
(iii) Amount of Working Capital Required
=
Cycles Operating of Number
Cost Operating Annual
=
` 9,50,000
4.244
= ` 2, 23,845.42
3. (a) Plan I = Raising Debt of ` 2.5 lakh + Equity of ` 22.5 lakh
Plan II = Raising Debt of ` 10 lakh + Equity of ` 15 lakh
Plan III = Raising Debt of ` 15 lakh + Equity of ` 10 lakh
Calculation of Earnings per share (EPS):
Particulars
FINANCIAL PLANS
Plan I Plan II Plan III
` ` `
Expected EBIT 5,00,000 5,00,000 5,00,000
Less: Interest
(a)
(25,000) (1,37,500) (2,37,500)
Earnings before taxes 4,75,000 3,62,500 2,62,500
Less: Taxes @ 50% (2,37,500) (1,81,250) (1,31,250)
Earnings after taxes (EAT) 2,37,500 1,81,250 1,31,250
Number of shares
(b)
15,000 10,000 8,000
Earnings per share (EPS) 15.83 18.13 16.41
Financing Plan II (i.e. Raising debt of ` 10 lakh and issue of equity share
capital of ` 15 lakh) is the option which maximises the earnings per
share.
579
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Oct 01, 2025
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