The document discusses ebit–eps analysis as a vital tool for optimizing capital structure to maximize shareholder earnings, detailing various capital financing options. It presents four plans for ABC Ltd. to raise an additional capital of Rs. 1,00,000, analyzing their respective earnings per share (EPS) under different financing structures. The findings suggest that raising all funds through debt financing yields the highest EPS at 15.16.

1. EBIT–EPS ANALYSIS

2. AGENDA
● EBIT – EPS ANALYSIS
● INCOME STATEMENT
● CAPITAL STRUCTURE
● SOURCES OF CAPITAL FINANCING
● EPS UNDER VARIOUS CAPITAL PLANS ( NUMERICAL EXAMPLE )

3. INTRODUCTION
● EBIT – EPS analysis is an important tool used to optimize the capital structure
for highest earnings for shareholders
● It helps in understanding the sensitivity of EPS at given level of Earning before
Interest & Tax under different sources of financing
● It helps in analyzing how capital structure decision is important to raise the
value of firm
● An optimal financing structure minimizes the cost of capital and maximizes the
earnings

4. Income
Statement
Sales
Less : Variable Cost Operating
= Contribution
Less : Fixed Cost
= Earning before Interest & Tax
Less : Interest on Debt
= Profit before Tax
Less : Tax Financing
= Profit after Tax
Less : Preference Dividend
= Equity Earnings
Earnings per Share =
Equity Earnings
No.of Shares

5. Capital
Structure
● Equity Share
● Debenture
● Preference Share

6. Earning Per
Share
● Plan 1 ( Only Equity Shares )
EPS =
EBIT (1−Tax rate)
No.of Outstanding Shares
● Plan 2 ( Equity Shares & Debt )
EPS =
EBIT −Interest (1−Tax rate)
No.of Outstanding Shares
● Plan 3 (Equity, Debt & Preference Shares)
EPS =
EBIT −Interest 1−Tax rate −Pref.Dividend
No.of Outstanding Shares
● Plan 4 (Equity shares & Preference Shares)
EPS =
EBIT 1−Tax rate −Pref.Dividend
No.of Outstanding Shares

7. PROBLEM
● ABC ltd. has existing equity share capital of Rs. 3,00,000 (face value 100 each). It has
decided to expand its business for which there is an additional capital requirement of Rs.
1,00,000. Now, it has following four alternatives sources to raise capital :-
1. Plan 1 – To raise full 1,00,000 through equity financing
2. Plan 2 – To raise 50,000 (face value of 100) through equity and 50,000 through debt at
int. rate of 10%p.a.
3. Plan 3 – To raise full 1,00,000 through debt financing @ interest rate of 10% p.a.
4. Plan 4 – To raise 50,000 through equity and 50,000 through 5% preference shares
● The expected level of EBIT is 75,000 . Tax rate is 30%. Which plan do you think it
should go for considering the one which would provide maximum EPS?

8. Plan 1
To raise full Rs.
1,00,000 from
issue of 1000
equity shares at
face value 100
Existing Share Capital = 3,00,000
At Face Value = 100
No. of Shares = 3,00,000 / 100 = 3000
Expected EBIT = 75,000
Tax rate = 30%
● EPS =
● EPS = = 13.12
EBIT (1 − Tax rate)
No. of Outstanding Shares
75,000(1 − 0.30)
3000 + 1000

9. Plan 2
To raise 50,000
through equity at
face value 100
and 50,000
through debt at
10% interest rate
Existing Share Capital = 3,00,000
At Face Value = 100
No. of Shares = 3,00,000 / 100 = 3000
Expected EBIT = 75,000
Tax rate = 30%
● New equity shares = 50,000 @ 100 face value
No. of shares = 50,000/100 = 500
● Interest on debt = 10% of 50,000 = 5000 p.a.
● EPS =
EBIT −Interest (1−Tax rate)
No.of Outstanding Shares
● EPS =
75,000−5,000 (1−0.30)
3000+500
= 14

10. Plan 3
To raise full
1,00,000 through
debt financing at
interest rate 10%
p.a.
● Existing Share Capital = 3,00,000
At Face Value = 100
No. of Shares = 3,00,000 / 100 = 3000
Expected EBIT = 75,000
Tax rate = 30%
● Interest on debt = 10% of 1,00,000 =
10,000
● EPS =
EBIT −Interest (1−Tax rate)
No.of Outstanding Shares
● EPS =
75,000 −10,000 (1−0.30)
3000
= 15.16

11. Plan 4
To raise 50,000
through equity
shares at face
value of 100 and
50,000 through
5% preference
shares
● Existing Share Capital = 3,00,000
At Face Value = 100
No. of Shares = 3,00,000 / 100 = 3000
Expected EBIT = 75,000
Tax rate = 30%
● New equity shares = 50,000 @ 100 face value
No. of shares = 50,000/100 = 500
● Dividend on pref. shares = 5% of 50,000 =
2500
● EPS =
EBIT 1−Tax rate −Pref.Dividend
No.of Outstanding Shares
● EPS =
75,000 1−0.30 −2500
3000+500
= 14.28

12. Plan 1 - EPS = 13.12
Plan 2 - EPS = 14
Plan 3 - EPS = 15.16
Plan 4 - EPS = 14.28
EPS UNDER DIFFERENT CAPITAL STRUCTURE
FINANCING PLANS

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