Read the following information and answer the question.
Company XYZ Ltd.
TOTAL FUND USED = 50 LAKHS
| Face value of share |
₹10/- |
| Interest rate on Debt | 10% |
| Tax rate | 20% |
| EBIT | 5 Lakhs |
| Situation I (Debt) | Nil |
| Situation II (Debt) | 15 Lakhs |
What will be the earning after tax in situation I ?
Answer & explanation
Correct answer: option 4
The correct answer is option 4- ₹4,00,000.
In situation I, there is no debt in total ₹50 lakh funds so there is no interest payment.
EBIT = 5,00,000
less: Interest = NIL
EBT 5,00,000 (Earnings before taxes)
less: Tax 1,00,000 (5,00,000 X 20/100)
EAT 4,00,000
Thus, Earning after tax is ₹4,00,000.