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How to compare different financial plans?
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/-
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