Ebit Eps

EBIT/EPS
ANALYSIS
INTRODUCTIO
N
EBIT-EPS analysis is To design
an approach which alternatives
various of debt,
equity and preference
helps in shares in order to
designing
the optimum maximize the EPS at
capital a given level of EBIT.
structure for
the
company or the
firm.
It examines how different capital structures
affect earnings available to
(Earning Per Share).
shareholders
It is the analysis of the effect of financing
alternatives on earnings per share.
To design the capital structure of the firm in
such a way so as to minimize the cost of
capital.
EBIT-EPS analysis is a method to study the
effect of leverage under alternative methods
of financing.
SALES : xxxxx
(-)V.C : xxx
=Contributio : xxxxx
n (-)F.C : xxxx
=EBIT {Earning Before Interest and

Taxes}
EBIT : xxxxx
(-)INTERSE : xxx
T
=EBT : xxxxx
(-)TA : xx
X
=Earning for ESH xxxxx
: (÷) No. of E.S xxx
:
= EPS {Earning Per xxx
Share}
Q: The present capital structure of Gupta Co. ltd. is:
4000, 5% Debentures of Rs 100 each Rs 4,00,000

2000, 8% P. Shares of Rs 100 each 4000, Rs 2,00,000
Equity shares of Rs 100 each Rs 4,00,000
Rs 10,00,000
The present earning of the company before interest & taxes are 10% of the
invested capital every year. The company is in need of Rs 2,00,000 for
purchasing a new equipment and it is estimated
that additional investment will also produce 10% earning before interest &
taxes every year.
The company has asked your advice as to whether the requisite amount be
obtained in the form of 5% Debenture or 8% P. Shares Or equity shares of Rs
100 each to be issued at par. Examine the problem in all its bearing and
advice firm if the Corporate tax rate is 50%.
Particulars i ii iii
Present Debentur P. Share Eq.
e Share
EBIT 1, 00, 000 1, 20, 000 1, 20, 000 1, 20, 000
(-)Interest 20, 000 30, 000 20, 000 20, 000
EBT 80, 90, 000 1, 00, 000 1, 00, 000
(-)Tax 50% 000 45, 000 50, 000 50, 000
40,
EAT 000 45, 000 50, 000 50, 000
(-)P. Dividend
16, 000 32, 000 16, 000
40,
ESH 000 29, 000 18, 000 34, 000
(÷) No. of Equity
Shares 16, 4, 000 4, 000 6, 000
000
EPS Rs 7. 25 Rs 4. 50 Rs 5. 67
Change in EPS 24, + 1. 25 - 1. 50 - 0. 33
000
4,
000
STATEMENT SHOWING THE EPS UNDER EXISTING &
PROPOSED
ALTERNATIVE
Particulars i ii iii
Present Debentur P. Share Eq.
e Share
EBIT 1, 00, 000 1, 20, 000 1, 20, 000 1, 20, 000
(-)Interest 20, 000 30, 000 20, 000 20, 000
EBT 80, 90, 000 1, 00, 000 1, 00, 000

(-)Tax 50% 000 45, 000 50, 000 50, 000
40,
EAT 000 45, 000 50, 000 50, 000
(-)P. Dividend 16, 000 32, 000 16, 000
40,
ESH 000 29, 000 18, 000 34, 000
(÷) No. of
Equity Shares 16, 4, 000 4, 000 6, 000
000
EPS Rs 7. 25 Rs 4. 50 Rs 5. 67
Change in EPS 24, + 1. 25 - 1. 50 - 0. 33
000
4,
000
 The EBIT level at which the EPS is the same for
two alternative financial plan is referred to as the
indifference point/level.
Financial break even point obtained by a company

at a given level of EBIT for which the firm’s EPS is
zero.
If EBIT is less than financial break even point, then

the EPS is negative.
If EBIT is more than the financial break even point,

then more and more fixed cost financing option can
APPROACHES TO
INDIF FERENCE ANALYSIS
•G r a p h i c a l a p p r o a c h
•a l G e b r i c a p p r o a c h
BREAKEVEN
EPS EBIT Debt +
Equity
3 alternativ
e
Equity
Alternativ
e
2
Indifference
point
0 EBIT
$1m $2m $3m
Falcon Ltd.
Existing capital structure= 1 lakh equity shares of Rs. 10 each

Tax rate= 50% and EBIT is given as RS 2 lakh.
Falcon Ltd. Plans to raise additional capital of Rs. 10 lakh for financing its project.
Following financial plans are under considerations:
Plan A: Issue of equity shares of Rs. 10 each
Plan B: Issue of debentures carrying 14% interest rate
(EBIT-I) (I-t) –PD

EPS = ---------------------------------------
n
Falcon Ltd.
Existing capital structure= Rs. 1 lakh equity share of Rs. 10 each

Tax rate= 50% and EBIT is given as RS 2 lakh.
Falcon Ltd. Plans to raise additional capital of Rs. 10 lakh for financing its project.
Following financial plans are under considerations:
Plan A: Issue of equity shares of Rs. 10 each
Plan B: Issue of debentures carrying 14% interest rate
PLAN A PLAN B
EBIT 2,00,000 2,00,000
Less: Int - 1,40,000
PBT 2,00,000 60,000
Less: Tax@50% 1,00,000 30,000
PAT 1,00,000 30,000
No of shares 2,00,000 1,00,000
EPS 0.5 0.3
ALGEBRIC
APPROACH
BREAKEVEN A N A LY S I S
For newly formed
company: X(1 -T) (X- I ) ( 1-
Equity vs. Debenture
T)
1
N = N2
=
X(1-T) X(1-I)-P
Equity vs. P. Shares = N1 =
N3
X(1-T) ( X-1 )( 1 -I ) - P
Equity vs. P. Shares vs. N1 = N4
Debenture=
For an existing company: {When debenture are

outstanding} ( X-1) (1-T ) (X-I1 )(1-T)-P
N1 =
N4
ALGEBRIC
APPROACH
BREAKEVEN A N A LY S I S
For newly formed
company: X(1 -T) (X- I ) ( 1-
Equity vs. Debenture
T)
1
N = N2
=
X(1-T) X(1-I)-P
Equity vs. P. Shares = N1 =
N3
X(1-T) ( X-1 )( 1 -I ) - P
Equity vs. P. Shares vs. N1 = N4
Debenture=
For an existing company: {When debenture are

outstanding} ( X-1) (1-T ) (X-I1 )(1-T)-P
N1 =
N4
Where
, X = EBIT
N1 = No. of Eq. shares outstanding if any eq. shares are issued
N2 = No. of Eq. shares outstanding if both eq. shares & debt are
N3 issued
N4 = No. of Eq. shares outstanding if both eq. & pref. shares are
issued
I
= No. of Eq. shares outstanding if both pref. shares & debt are
P
issued
T
= Interest on debentures
= Pref. Dividend
= Corporate Tax Rate
INDIFFERENCE POINT
•The level of EBIT for which EPS is same under both the plans
(EBIT-I1) (1- t) -PD = (EBIT-I2) (1- t) -PD

n n
Where EBIT is Indifference point

INDIFFERENCE POINT
•The level of EBIT for which EPS is same under both the plans
(EBIT-I1) (1- t) = (EBIT-I2) (1- t)

n1 n2
(EBIT-0) (1- 0.5) = (EBIT-140000) (1- 0.5)
200000 100000
EBIT = ?

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Ebit Eps

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EBIT/EPS

=EBIT {Earning Before Interest and

4000, 5% Debentures of Rs 100 each Rs 4,00,000

EBT 80, 90, 000 1, 00, 000 1, 00, 000

Financial break even point obtained by a company

If EBIT is less than financial break even point, then

If EBIT is more than the financial break even point,

Existing capital structure= 1 lakh equity shares of Rs. 10 each

(EBIT-I) (I-t) –PD

Existing capital structure= Rs. 1 lakh equity share of Rs. 10 each

For an existing company: {When debenture are

For an existing company: {When debenture are

(EBIT-I1) (1- t) -PD = (EBIT-I2) (1- t) -PD

Where EBIT is Indifference point

(EBIT-I1) (1- t) = (EBIT-I2) (1- t)

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