X Ltd. is considering the following two alternative financing plans : Particulars Plan I (₹) Plan II (₹) Equity shares @ ₹10 each 8,00,000 8,00,000 12% Debentures 4,00,000 - Preference shares @ ₹100 each - 4,00,000 Total

Amount in ₹ Plan I Plan II EBIT 4,80,000 4,80,000 Less: Interest @12% on 4,00,000 48,000 - EBT 4,32,000 4,80,000 Less: Tax @ 30% 1,29,600 1,44,000 EAT 3,02,400 3,36,000 Less: Preference Dividend - X (Assume) Earning of Equity Shareholders 3,02,400 3,36,000 - x Number of Equity Shares 80,000 80,000 EPS of Plan I is equal to EPS of Plan II at Indifference Level EPS = Earning for Equity shareholders/No. of equity shares ₹3,02,400 / 80,000 = (₹3,36,000 - x) / 80,000 ₹3.78 = (₹3,36,000 - x) / 80,000 ₹3,02,400 = ₹3,36,000 - x x = ₹3,36,000 - ₹3,02,400 = ₹33,600 Pref. Dividend₂ = ₹33,600 Pref. Dividend per share = ₹33,600 / 4,000 = ₹8.40 Rate of Preference Dividend = 8.4% Alternatively, Indifference point is calculated as follows: (EBIT - Interest₁) (1-t) - Pref. Dividend₁ / Number of Equity Shares₁ = (EBIT - Interest₂) (1-t) - Pref. Dividend₂ / Number of Equity Shares₂ (₹4,80,000 - ₹48,000) (1-0.30) - 0 / 80,000 = (₹4,80,000 - 0) (1-0.30) - Pref. Dividend₂ / 80,000 ₹3,02,400 = ₹3,36,000 - Pref. Dividend₂ Pref. Dividend₂ = ₹33,600 Pref. Dividend per share = ₹33,600 / 4,000 = ₹8.40 Rate of Preference Dividend = 8.4%