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Relationship Between EBIT-EPS (in Hindi)
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Heena Malhotra
Believe in Conceptual Learning.

Unacademy user
ma'am In this course the scheme Swarna Jayanti Shahari Rozgar Yojna (SJSRY) is replaced by National Urban Livelihood Mission (DAY-NULM) so it will be now called NULM? And thank you ma'am you have explained really very well and magnificiently.Waiting for the next course.
mam aise question aata h exam m???
Sakshi Singh
5 months ago
no
Sakshi Singh
5 months ago
its for ca students
Mam my question is -- When shares outstanding ( equity) became 125000 ( since 2500 new shares were issued) then why preference shares are only 100000 ( I mean 2500 new pref. shares were also issued)
Heena Malhotra
10 months ago
Because we are calculating earning per share. earning per share is calculated for equity share only i.e, (EAT - Preference dividend) is equal to earning available to equity shareholders.
Anjali yadav
10 months ago
thank you Mam😃
Anjali yadav
10 months ago
thank you Mam😃
Anjali yadav
10 months ago
thank you Mam😃
Anjali yadav
10 months ago
thank you Mam😃
Anjali yadav
10 months ago
thank you Mam😃
Heena Malhotra
10 months ago
Welcome ☺️☺️
shares out standing k n Pata lg rh aur SB clear h
maam taxation toh sirf debenture mein hi less hogy toh equity coloumn se q less kiye 50%?
Heena Malhotra
9 months ago
Tax to co ko pay krna h na govt ko, wo to hr case m co ko pay krna pdega, wo baat thi Jo aap bol rhe ho ki tax benefit mil jayega debenture ke case m.. means co debt use krti h to tax kam pay Krna pdega co ko.
Janak Chauhan
9 months ago
ok maam thanku now I got
preference shares 1 lakh hi kyu aaye ?
Heena Malhotra
10 months ago
2500*100=Rs.250000 preference shares.. I'm not able to understand your question, can you please elaborate.. ☺️☺️
Anjali yadav
10 months ago
Mam .. my question is -- When shares outstanding became 125000 ( becoz new 25000 equity shares were issued ) then why preference shares outstanding is only 100000 ( I mean 2500 new preference shares were issued ) won't it be added ?
  1. Capital Structure Decision By Heena Malhotra


  2. Suppose that a fim has an all quity capitol structure consting of 10000 ordinary shares 10 per share. The firm wants to raise 250,000 to finance its investments and is considering threealternatve methods offiancing-lj toissue 25,000ordinary shares at 10 each,() to borrow 12,50,000at 8 per cent rate of interest,(i to issue 2,50 reference shares of100 each at an 8 per cent rate of dividend. f the firm's earnings before interest and toxes after aditional investment are 3,12,500 and the tax rate is 50 er cent the efect on the earnings per share under the thre financing aternatives will be as folows By Heena Malhotra


  3. Table: EPS under alternative financing favorable EBIT Particulars Equity Financing Debt Financing Preference Financing EBIT Less: Interest PBT Less: Taxes PAT Less: Preference dividend 3,12,000 0 3,12,500 1,56,250 1,56,250 0 3,12,550 20,000 2,92,500 1,46,250 1,46,250 0 3,12,550 0 3,12,500 1,56,250 1,56,250 20,000 Earning available to ordinary 1.56.250 146.250 1.36.250 shareholders Shares outstanding EPS 1,25,000 1.25 1,00,000 1.46 1,00,000 1.36 By Heena Malhotra


  4. Table: EPS under alternative financing methods: Unfavourable EBIT Equity Financing Debt Financing Preference Financing () 75,000 0 75,000 37 500 1,56,250 20,000 Particulars 75,000 20,000 55,000 27 500 1,46,250 0 27,500 EBIT 75,000 Less: Interest 75,000 37000 37,500 0 1,56,250 PBT Less: Taxes PAT Less: Preference dividend Earning available to ordinary shareholders 17,500 Shares outstanding EPS 1,25,0001,0,000 1,00,000 0.17 By Heena Malhotra 0.30 0.27


  5. o With increasing levels of EBIT, EPS will increase at a faster rate with a high degree of leverage. By Heena Malhotra


  6. Relationship between EBIT - EPS O The basic objective of financial management is to design an appropriate capital structure which can provide the highest earnings per share (EPS) over the company's expected range of earnings before interest and taxes (EBIT). o EPS measures a company's performance for the shareholders. The level of EBIT varies from year to year and represents the success of a company's operations. By Heena Malhotra


  7. Relationship between EBIT - EPS o The financial leverage affects the pattern of distribution of operating profit among various types of investors and increases the variability of the EPS of the firm. Therefore, in search for an appropriate capitals structure for a firm, the financial manager must analyse the effects of various alternative financial leverages on the EPS. O Given a level of EBIT, EPS will be different under different financing mix depending upon the extent of debt financing. The effect of leverage on the EPS emerges because of the existence of fixed financial charge i.e., interest on debt financial fixed dividend on preference share capital. o The effect of fixed financial charge on the EPS depends upon the relationship between the rate of return on assets and the rate of fixed charge. If the rate of return on assets is higher than the cost of financing, then the increasing use of fixed charge financing (i.e., debt and preference share capitabywilHleresultlintra increase in the EPS This situation is also known as favourable financial leverage or Trading on Equity


  8. Relationship between EBIT - EPS o On the other hand, if the rate of return on assets is less than the cost of financing, then the effect may be negative and, therefore, the increasing use of debt and preference share capital may reduce the EPS of the firm. O The fixed financial charge financing may further be analyzed with reference to the choice between the debt financing and the issue of preference shares. Theoretically, the choice is tilted in favour of debt financing for two reasons: o (i) the explicit cost ofdebt financing i.e., the rate of interest payable on debt instruments or loans is generally lower than the rate of fixed dividend payable on preference shares, and O (ii) interest on debt financing is tax-deductible and therefore the real cost (after-tax) is lower than the cost of preference share capital Heena Malhotra


  9. Relationship between EBIT - EPS O Thus, the analysis of the different types of capital structure and the effect of leverage on the expected EPS will provide a useful guide to selection of a particular level of debt financing O The EBIT-EPS analysis is of significant importance and if undertaken properly, can be an effective tool in the hands of a financial manager to get an insight into the planning and designing of the capital structure of the firm. By Heena Malhotra