Kindly help me with the question below
Regards
Solution :-
Rate of Return of Investment is = 4,00,000/10,00,000 x 100 = 40%
Earnings before Interest and Tax (EBIT) after expansion = 40% x 15,00,000 = 6,00,000
Calculation of Earnings Per Share (EPS) :-
The Company should use Plan 2 in order to maximise the returns to the equity shareholders.
Rate of Return of Investment is = 4,00,000/10,00,000 x 100 = 40%
Earnings before Interest and Tax (EBIT) after expansion = 40% x 15,00,000 = 6,00,000
Calculation of Earnings Per Share (EPS) :-
| Plan 1 | Plan 2 | |
| EBIT | 6,00,000 | 6,00,000 |
| (-) Interest | - | 50,000 |
| Earnings before Tax (EBT) [EBIT - Interest] |
6,00,000 | 5,50,000 |
| (-) Tax (50% of Earnings Before Tax) | 3,00,000 | 2,75,000 |
| Earnings After Tax (EAT) [EBT - Tax] |
3,00,000 | 2,75,000 |
| Number of Shares | 15,000 | 10,000 |
| Earnings Per Share (EPS) [EAT / No. of shares] |
20 | 27.5 |
The Company should use Plan 2 in order to maximise the returns to the equity shareholders.