A company has earnings before interest and taxes (EBIT) of Rs. 9 lakh. It has issued 10% debentures of Rs. 10 lakh. The tax rate is 25%. What are its earnings after taxes (EAT)?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 6 lakh
Given:
EBIT = Rs. 9 lakh
10% debentures = Rs. 10 lakh
Tax rate = 25%
Formula: EAT = (EBIT − Interest) − Tax on EBT
Interest = 10% of 10 = Rs. 1 lakh
EBT = 9 − 1 = Rs. 8 lakh
Tax = 25% of 8 = Rs. 2 lakh
EAT = 8 − 2 = Rs. 6 lakh
Result: EAT = Rs. 6 lakh (Rs. 6,00,000).
Option (1) Rs. 8 lakh — Incorrect. This is the EBT; the tax is not taken off.
Option (2) Rs. 6.75 lakh — Incorrect. This is 9 × 0.75, which leaves out the interest.
Option (3) Rs. 6 lakh — Correct. As worked out above.
Option (4) Rs. 5.75 lakh — Incorrect. This charges tax on the EBIT (25% of 9 = 2.25). Interest is deducted first, and tax is charged on the EBT.
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. …”
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