​please explain :)

Dear Student


(a)
Computation of EPS
Particulars  Current Year 
Earnings before interest and Tax                  800,000
Less : Interest on Debentures (40,00,000 x 10%)                  400,000
Earnings before Tax                  400,000
Less : tax @ 40%                  160,000
Earinings after tax                  240,000
Number of shares  (60,00,000 / 10)                  600,000
EPS = Earnings / Number                          0.40

Now as previous year's EPS is Rs 0.50/-  which is more then current year's EPS, Shareholders have clearly lost by Rs 0.10/- per share.


(b)
1. Debenture act as Tax Deductible item i.e Due to interest tax amount is reduced.
2. Debentures do not dilute the ownership of existing shareholders.
3. Only Fixed amount of Interest or Principal is to be paid on debentures wheareas on shares cost of equity increases as the earnings increase.


Regards

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