Untitled-29

Capital Structure Theories^301

(iii) EBIT = Rs. 1,30,000 (6.5 percent return )

(iv) EBIT = Rs. 1,60,000 (8 percent return )

(v) EBIT = Rs. 2,00,000 (10 percent return )

Table shows that when the EBIT level exceeds the financial break-even level (Rs.25,000,
Rs.60,000 for financing alternatives, B, C respectively) EPS increases. The percentage
increase in EPS is the greatest when EBIT is nearest the break-even point. Thus, in

Particulars Financing Plans

A B C

1,30,000

-------

1,30,000

25,000

1,30,000

60,000

1,30,000

45,500

1,05,000

36,750

70,000

24,500

84,500

------

68,250

------

45,500

------

EBIT

Less: Interest

EBIT

Less: Taxes

EAT

Less: Preference dividend

EAT for equity-holders

EPS

84,500

4.22

68,250

4.55

45,500

4.55

Particulars Financing Plans

A B C

1,60,000

-------

1,60,000

25,000

1,60,000

60,000

1,60,000

56,000

1,35,000

47,250

1,00,000

35,000

1,04,500

------

87,750

------

65,000

------

EBIT

Less: Interest

EBIT

Less: Taxes

EAT

Less: Preference dividend

EAT for equity-holders

EPS

1,04,500

5.2

87,750

5.8

65,000

6.5

Particulars Financing Plans

A B C

2,00,000

-------

2,00,000

25,000

2,00,000

60,000

2,00,000

70,000

1,75,000

61,250

1,40,000

49,000

1,30,000

------

1,13,750

------

91,500

------

EBIT

Less: Interest

EBIT

Less: Taxes

EAT

Less: Preference dividend

EAT for equity-holders

EPS

1,30,000

6.5

1,13,750

7.6

91,500

9.1