(^300) Financial Management
Equation gives before - tax earnings necessary to cover the firm's fixed financial
obligations. As fixed financial charges are added, the break-even point for zero EPS is
increased by the amount of the additional fixed cost. Beyond the financial break-even
point, increase in EPS is more than the proportionate increase in EBIT. This is illustrated
in Table, which presents the EBIT-EPS relationship for the data in Example under the
various EBIT assumptions given in the box
(i) Rs.80,000 (4 per cent return on total assets)
(ii) Rs.1,00,000 (5 per cent return on total assets)
(iii) Rs.1,30,000 (4 per cent return on total assets)
(iv) Rs.1,60,000 (4 per cent return on total assets)
(v) Rs.2,00,000 (4 per cent return on total assets)
EBIT-EPS Analysis under Various EBIT Assumptions for the three financing Plans of
Example
(i) EBIT = Rs. 80,000 (4 percent return on investments)
(ii) EBIT = Rs. 1,00,000 (5 percent return )
Particulars Financing Plans
A B C
1,00,000
1,00,000
25,000
1,00,000
60,000
1,00,000
35,000
75,000
26,250
40,000
14,000
65,000
48,750
26,000
EBIT
Less: Interest
EBIT
Less: Taxes
EAT
Less: Preference dividend
EAT for equity-holders
EPS
65,000
3.25
48,750
3.25
26,000
2.6
Particulars Financing Plans
A B C
80,000
80,000
25,000
80,000
60,000
80,000
28,000
55,000
19,250
20,000
7,000
52,000
35,750
13,000
EBIT
Less: Interest
EBIT
Less: Taxes
EAT
Less: Preference dividend
EAT for equity-holders
EPS
52,000
2.6
35,750
2.38
13,000
1.3