PRESENTED BY:

GYANDEEP KUMAR
MBA 2nd SEM
 EBIT-EPS  To design
analysis is an various
approach which alternatives of
helps in debt, equity and
designing the preference
optimum capital shares in order
structure for to maximize the
the company or EPS at a given
the firm. level of EBIT.
It examines how different capital
structures affect earnings available
to shareholders (Earning Per
Share).
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
Sales : xxxxx
(-)V.C : xxx

=Contribution : xxxxx
(-)F.C : xxxx

=EBIT {Earning Before Interest

and Taxes}
EBIT : xxxxx
(-)INTERSET : xxx

=EBT : xxxxx
(-)TAX : xx

=Earning for ESH : xxxxx

(÷) No. of E.S : xxx

= EPS {Earning Per Share}

xxx
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 Rs
2,00,000
4000, 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
STATEMENT SHOWING THE EPS UNDER EXISTING & PROPOSED
ALTERNATIVE
ALTENATIVES
Particular i ii iii
s Present Debenture P. Share Eq. Share

EBIT 1,00,000 1,20,000 1,20,000 1,20,000

(-)Interest 20,000 30,000 20,000 20,000

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

(-)Tax 40,000 45,000 50,000 50,000
50%
EAT 40,000 45,000 50,000 50,000
(-)P. 16,000 16,000 32,000 16,000
Dividend
ESH 24,000 29,000 18,000 34,000
(÷) No. of 4,000 4,000 4,000 6,000
Equity
Shares
EPS Rs 6.00 Rs 7.25 Rs 4.50 Rs 5.67
Change in - +1.25 -1.50 -0.33
EPS
 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 be used by a
APPROACHES TO INDIFFERENCE
ANALYSIS

•Graphical approach
•Algebric approach
 BREAKEVEN
EPS EBIT Debt + Equity
alternative
3
Equity
Alternative

2
Indifference point

0 EBIT
$1m $2m $3m $4m
 Algebric approach
Breakeven analysis

For newly formed company:

X(1-T) (X-I)(1-T)
Equity vs. Debenture =
N1 = N2

Equity vs. P. SharesX(1-T)

= =
X(1-I)-P
N1 N3

X(1-T) (X-1)(1-I)-P
Equity vs. P. Shares vs. Debenture= =
N1 N4

 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 issued
N3 = No. of Eq. shares outstanding if both eq. & pref.
shares are issued
N4 = No. of Eq. shares outstanding if both pref. shares &
debt are issued
I = Interest on debentures
P = Pref. Dividend
T = Corporate Tax Rate
REFERENCES:
• KHAN, M.Y. & JAIN, P.K.; FINANCIAL
MANAGEMENT (TATA MC GRAW- HILL
PUBLISHING CO. LTD.),1995

•PANDEY, I.M.; FINANCIAL MANAGEMENT

(VIKAS PUBLISHING HOUSE LTD.), 2007

•SAHNI, D.; BUSINESS FINANCE (KEDAR

NATH RAM NATH), 2009