Answer the questions on the basis of the information given below.
Company X
TOTAL FUND USED = 30 LAKHS
| Face value of share |
₹10/- |
| Interest rate on Debt | 10% |
| Tax rate | 30% |
| EBIT | 4 Lakhs |
| Situation I (Debt) | Nil |
| Situation II (Debt) | 10 Lakhs |
Choose the correct answer from the options given below:
The Earning After Tax (EAT) for Situation I will be:
Answer & explanation
Correct answer: option 1
The correct answer is option 1- ₹2,80,000.
In situation I, there is no debt in total ₹30 lakh funds so there is no interest payment.
EBIT = 4,00,000
less: Interest = NIL
EBT 4,00,000 (Earnings before taxes)
less: Tax 1,20,000 (4,00,000 X 30/100)
EAT 2,80,000
Thus, Earning after tax is ₹2,80,000.