please explain :)
Dear Student
(a)
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
(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