M/s ATS Fun Ltd wants to raise ₹100 Lakh as capital for investments in a proposed project for setting up of an amusement park. The company expects earnings before interest and taxes (EBIT) ₹40 Lakh per annum. The managem

Calculation of Earnings Per Share: Alternatives Option (a) Issue 10,00,000 equity share of ₹10 each Option (b) Issue 5,00,000 equity shares of ₹10 each & 50000 12% pref. shares of ₹100 each Option (c) Issue 5,00,000 equity shares of ₹10 each & 10% debentures of ₹50,00,000 EBIT (Earnings before interest & tax) 40 40 40 Less: 10% Interest on debentures — — (5) EBT (Earning before tax) 40 40 35 Less: Tax @ 30% (12) (12) (10.5) PAT (Profit after tax) 28 28 24.5 Pref. 12% Dividend on Preference Shares — (6) — Profit available to equity shareholders 28 22 24.5 Number of equity shares 10,00,000 5,00,000 5,00,000 (EPS) Earnings per share ₹2.80 ₹4.40 ₹4.90 Advice: In case of alternative (c) i.e. capital structure consisting of debt-equity (trading on equity) the earnings per share is highest, hence the alternative (c) should be followed in order to maximize the return to shareholders.