A company has 2,00,000 equity shares and debt of Rs. 10 lakh at 10% p.a. The tax rate is 30%. What EBIT must it earn to have an earnings per share (EPS) of Rs. 1.40?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 5.00 lakh
Given:
Number of equity shares = 2,00,000
Debt = Rs. 10 lakh at 10% p.a.
Tax rate = 30%
Target EPS = Rs. 1.40
Formula: EPS = (EBIT − Interest) × (1 − tax rate) / Number of equity shares, worked backwards
EAT = 1.40 × 2,00,000 = Rs. 2.80 lakh
EBT = 2.80 / (1 − 0.30) = Rs. 4.00 lakh
Interest = 10% of 10 = Rs. 1.00 lakh
EBIT = 4.00 + 1.00 = Rs. 5.00 lakh
Result: EBIT needed = Rs. 5.00 lakh (Rs. 5,00,000).
Option (1) Rs. 4.00 lakh — Incorrect. This is the EBT; the interest of Rs. 1 lakh is not added back.
Option (2) Rs. 3.80 lakh — Incorrect. This adds the interest to the EAT of 2.80 and leaves out the tax.
Option (3) Rs. 5.00 lakh — Correct. As worked out above.
Option (4) Rs. 4.64 lakh — Incorrect. This takes tax as 30% of the EAT (2.80 × 1.30 = 3.64) and adds the interest. Tax is 30% of the EBT, so 2.80 must be divided by 0.70.
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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