Answer the questions on the basis of the information given below.

Company X
TOTAL FUND USED = 30 LAKHS

 Choose the correct answer from the options given below:

Identify the situation in which company X can avail the benefit of trading on equity.

Situation II

  SITUATION I-

        EBIT = 4,00,000 
less: Interest = NIL
         EBT 4,00,000 (Earnings before taxes)
less: Tax 1,20,000 
         EAT 2,80,000

Earning per share = EAT/ no of shares
No of shares = 30 lakhs/10
                     = 300000
EPS = 280000/300000
       = 0.93

SITUATION II-
In this situation total fund is 30 lakhs in which 10 lakhs is debt so share capital is 20 lakhs.

         EBIT = 4,00,000 
less: Interest = 100000
         EBT = 3,00,000 (Earnings before taxes)
less: Tax = 90,000 
         EAT 2,10,000

Earning per share = EAT/ no of shares
No of shares = 20 lakhs/10
                     = 200000
EPS = 210000/200000
       = 1.05

THUS, EPS IS MORE IN SITUATION II WITH USE OF DEBT. SO, COMPANY CAN AVAIL BENEFIT OF TRADING ON EQUITY WITH SITUATION II.