M/s GTP Private Ltd, a widely held company is considering a major expansion of its production facilities and the following alternatives are available: (Table of Share Capital, Debentures, Loan from FI for alternatives A,

CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · PYQS · June 2024
M/s GTP Private Ltd, a widely held company is considering a major expansion of its production facilities and the following alternatives are available: (Table of Share Capital, Debentures, Loan from FI for alternatives A, B, C). The expected rate of return before tax is 25%. The rate of dividend of the company is not less than 20%. The company at present has low debt. Corporate tax is 30%. Which of the alternatives you would choose?

Answer & Explanation:

Evaluation of financial alternative Particulars A B C (EBIT) Earnings before Interest & Taxes 12.50 12.50 12.50 (25% of ₹ 50 lakhs) Less: (i) Interest on Debentures (2.80) (2.10) (ii) Interest on Loan (1.50) (3.75) EBT (Profit Before Taxes) 12.50 8.20 6.65 Less: Taxes @30% 3.75 2.46 2.00 PAT (Profit After Taxes) 8.75 5.74 4.65 Number of Shares (In Lakh) 5.00 2.00 1.00 EPS (Earning per shares) 1.75 2.87 4.65 Alternative (C) is more profitable because shareholders will be benefited more. Therefore alternative (C) should be chosen.

Topics: Corporate Tax Planning

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