From the following information, calculate the earnings per share (EPS) of the company:
| Earnings before interest and taxes (EBIT) | Rs. 7 lakh |
| Interest on debentures | Rs. 2 lakh |
| Tax rate | 30% |
| Number of equity shares | 2,00,000 |
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 1.75
Given:
EBIT = Rs. 7 lakh; Interest on debentures = Rs. 2 lakh
Tax rate = 30%; Number of equity shares = 2,00,000
EPS = Earnings after tax ÷ Number of equity shares
EBT = 7 − 2 = Rs. 5 lakh
Tax = 30% of Rs. 5 lakh = Rs. 1.5 lakh
EAT = 5 − 1.5 = Rs. 3.5 lakh
EPS = 3,50,000 ÷ 2,00,000 = Rs. 1.75
Option (1) Rs. 2.50 — Incorrect. Tax has been left out: EBT of 5,00,000 ÷ 2,00,000 gives 2.50.
Option (2) Rs. 2.45 — Incorrect. Interest has been left out: 30% tax on the full Rs. 7 lakh leaves Rs. 4.9 lakh, and 4,90,000 ÷ 2,00,000 gives 2.45.
Option (3) Rs. 1.45 — Incorrect. Tax has been worked on EBIT before interest: 30% of 7 lakh is Rs. 2.1 lakh, so 7 − 2.1 − 2 leaves Rs. 2.9 lakh and gives 1.45.
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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