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 |
Calculate the earning after tax in situation II.
Answer & explanation
Correct answer: option 1
The correct answer is option 1- ₹2,80,000.
Debt = 15 lakhs
Interest = 10%
Interest amount = 15,00,000 x 10/100
= 1,50,000
EBIT = 5,00,000
less: Interest = 1,50,000
EBT = 3,50,000 (Earnings before taxes)
less: Tax = 70,000 (3,50,000 x 20/100)
EAT 2,80,000
Thus, EAT for situation II is 2,80,000.