ABC Ltd. wants to raise ₹5,00,000 as additional capital. It has two mutually exclusive alternative financial plans. The current EBIT is ₹17,00,000 which is likely to remain unchanged. The relevant Information is : Presen

1. Computation of EBIT - EPS Indifference Point: Particulars Financial Plan 1 - Equity Financial Plan II - Debt Owner's Funds (3,00,000 x 10 + 20,000 x 25) = ₹35,00,000 3,00,000 x 10 = ₹30,00,000 Borrowed Funds (given) ₹20,00,000 20,00,000 + 5,00,000 = ₹25,00,000 Total Capital Employed ₹55,00,000 ₹55,00,000 Particulars Financial Plan 1 Financial Plan II EBIT (let it be X) X X Less: Interest 20,00,000 x 10% = ₹2,00,000 (20,00,000 x 10% + 5,00,000 x 12%) = ₹2,60,000 EBT X-2,00,000 X-2,60,000 Less: Tax at 50% ½ X-1,00,000 ½ X-1,30,000 EAT ½ X-1,00,000 ½ X-1,30,000 Number of Equity Shares 3,00,000 + 20,000 = 3,20,000 (given) 3,00,000 EPS (½ X-1,00,000) ÷ 3,20,000 (½ X-1,30,000) ÷ 3,00,000 For indifference between the above alternatives, EPS should be equal. Hence, we have (1/2 X - 1,00,000) / 3,20,000 = (1/2 X - 1,30,000) / 3,00,000 On Cross Multiplication, 1.5X - 30 Lakhs = 1.6X - 41.6 Lakhs; or X = 11.6 Lakhs Hence EBIT should be ₹11.60 Lakhs and at that level, EPS will be ₹1.50 under both alternatives. 2. Computation of Financial Break-Even Point The Financial BEP for the two plans are - Plan I EBIT = ₹2,00,000 (i.e. 10% interest on ₹20,00,000) Plan II EBIT = ₹2,60,000 (i.e. 10% interest on ₹20,00,000 and 12% interest on ₹5,00,000)