Read the following information about a company:
| Total funds used | Rs. 60 lakh |
| Debt at 10% p.a. | Rs. 30 lakh |
| Rest of the funds | Equity shares of Rs. 10 each |
| EBIT | Rs. 9 lakh |
| Tax rate | 20% |
What is the earnings per share (EPS) of the company?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs. 1.60
Given:
Debt = Rs. 30 lakh at 10% p.a.
Equity = Rs. 60 lakh − Rs. 30 lakh = Rs. 30 lakh
Number of shares = Rs. 30 lakh ÷ Rs. 10 = 3,00,000
EBIT = Rs. 9 lakh; Tax rate = 20%
EPS = Earnings after tax ÷ Number of equity shares
Interest = 10% of Rs. 30 lakh = Rs. 3 lakh
EBT = 9 − 3 = Rs. 6 lakh
Tax = 20% of 6 = Rs. 1.2 lakh
EAT = 6 − 1.2 = Rs. 4.8 lakh
EPS = Rs. 4,80,000 ÷ 3,00,000 shares = Rs. 1.60
Option (2) Rs. 2.00 — Incorrect. This leaves out the tax: Rs. 6,00,000 ÷ 3,00,000 = Rs. 2.00.
Option (3) Rs. 2.40 — Incorrect. This leaves out the interest. Tax is taken on the full EBIT of Rs. 9 lakh: Rs. 7,20,000 ÷ 3,00,000 = Rs. 2.40.
Option (4) Rs. 0.80 — Incorrect. This divides by 6,00,000 shares, as if all Rs. 60 lakh were equity: Rs. 4,80,000 ÷ 6,00,000 = Rs. 0.80.
NCERT (2026-27 Edition): “EBIT-EPS Analysis … The impact of financial leverage on the profitability of a business can be seen through EBIT-EPS (Earning before Interest and Taxes-Earning per Share) analysis as in the following example. Three situations are considered. There is no debt in situation-I i.e. (unlevered business). Debt of Rs. 10 lakh and 20 lakh are assumed in situations-II and III, respectively. All debt is at 10% p.a. The company earns Rs. 0.93 per share if it is unlevered. With debt of Rs. 10 lakh its EPS is Rs. 1.05. With a still higher debt of Rs. 20 lakh, its, EPS rises to Rs. 1.40. …” |