The document discusses capital structure and methods for analyzing its impact, including the EBIT-EPS approach. It provides an example calculation of EBIT, interest, taxes, earnings, and EPS under different capital structure scenarios involving debt and equity. The example considers which form of financing - debentures, preference shares, or equity shares - would be best for a company needing Rs. 200,000 based on the impact on EPS. Tables show the calculations and indicate preference shares would increase EPS the most.

1. Capital structure
The term capital structure is used to
represent the proportionate relationship
between debt preference and equity
shares on a firms balance sheet

2. EBIT-EPS approach
• The EBIT-EPS approach is one method
available to managers to guide them in
making decisions about capital structure
• This approach helpful to analyze the
impact of debt on earning per share

3. Drawbacks
• The EBIT-EPS approach places heavy emphasis
on maximizing earnings per share rather than
controlling costs and limiting risk

4. Calculation of EBIT
particulars amount
sales xxx
variable cost xx
contribution xxxx
fixed cost xx
EBIT(earning before
interest and taxes) xxxx

5. Particular Amount
EBIT Xxxx
(-) interest Xx
= EBT Xxxx
(-) Tax Xx
= Earning for ESH Xxxx
Divided by no. of
E.S
Xxx
EPS (Earning Per
Share)
xxxx
Calculation of EPS

6. Q: The present capital structure of Gupta Co. ltd. is:
4000, 5% Debentures of Rs 100 each Rs 4,00,000
2000, 8% P. Shares of Rs 100 each Rs 2,00,000
4000, Equity shares of Rs 100 each Rs 4,00,000
Rs 10,00,000
10,00,000
The present earning of the company before interest & taxes are 10% of
the invested capital every year. The company is in need of Rs 2,00,000 for
purchasing a new equipment and it is estimated that additional
investment will also produce 10% earning before interest & taxes every
year.
The company has asked your advice as to whether the requisite amount
be obtained in the form of 5% Debenture or 8% P. Shares
Or equity shares of Rs 100 each to be issued at par. Examine the problem
in all its bearing and advice firm if the Corporate tax rate is 50%.
Example

7. Particulars
Present
i
Debenture
ii
P. Share
iii
Eq. Share
EBIT
(-)Interest
1,00,000
20,000
1,20,000
30,000
1,20,000
20,000
1,20,000
20,000
EBT
(-)Tax 50%
80,000
40,000
90,000
45,000
1,00,000
50,000
1,00,000
50,000
EAT
(-)P. Dividend
40,000
16,000
45,000
16,000
50,000
32,000
50,000
16,000
ESH
(÷) No. of Equity
Shares
24,000
4,000
29,000
4,000
18,000
4,000
34,000
6,000
EPS
Change in EPS
Rs 6.00
-
Rs 7.25
+1.25
Rs 4.50
-1.50
Rs 5.67
-0.33
Tabulated structure

8. BREAKEVEN EBIT
EPS
EBIT
$1m $2m $3m $4m
Debt + Equity
alternative
Equity
Alternative
0
3
2
1
Indifference point

9. Conclusion
• If expected EBIT > EBIT at indifference point debt financing
is beneficial
• If expected EBIT < EBIT at indifference point equity financing
is beneficial
Debt Financing
Equity Financing

10. Residual dividend
• The dividend payments are made from the equity that remains
after all the project capital needs are met. This equity is also
known as residual equity
• If a certain amount of money is left after all forms of business
expenses then the corporate houses distribute that money among
its shareholders as dividends.
• Companies that follow a residual dividend policy only when
other satisfactory opportunities and sources of investment of
funds are not available.

11. Stable dividend policy
It is the policy in which dividend given is fixed ,stable or consistently
given at a regular interval of time.
Benefits
1. Confidence Among Shareholders.
2. Income Conscious Investors.
3. Stability in Market Price of Shares.
4. Encouragement to Institutional Investors.

12. Dividend policy VS Bonus shares
• The policy a company uses to
decide how much it will pay
out to shareholders in dividends
• It does not increase the number
of share with the share holder
• Bonus shares are shares given
to existing stockholders in
proportion to the number of
shares they hold.
• The total number of share gets
increased.
Dividend Policy Bonus shares

13. • The policy a company uses
to decide how much it will
pay out to shareholders in
dividends.
• It means repurchasing its own
share in the market out of
the profit generated
Buy back of shareDividend Policy
surplus earnings are distributed to share holders in
the form of cash dividends or to repurchase
the company's stock
Dividend Policy V/S buy back of share

14. Bonus shares are shares given to
existing stockholders in
proportion to the number of
shares they hold.
the EPS would reduce as the
equity capital has gone up
Bonus shares are issued from
the free reserves of the
company
Stock splits are mainly carried
out with the intention of
increasing liquidity
new investors might like to buy
the stock as it is available at a
lower price
stock-split is a division of a share
into shares with lower face
value.
Bonus shares V/S stock split