EARNINGS BEFORE INTEREST AND

TAXES.
I. Accountants like to use the term net operating income
for this income statement item, WHY? Because

II. It is the amount of income that a company has after

subtracting operating expenses from sales (hence the
term net operating income).

III. Finance people usually refer to it as EBIT on an income

statement.

IV. Another way of looking at it is that is the income that

the company has before subtracting interest and taxes
(hence EBIT).
 EARNINGS PER SHARE.

This is the amount of income that the common

stockholders are entitled to receive (per share of
stock owned).

This income may be paid out in the form of

dividends, retained and reinvested by the
company, or a combination of both, ( it is
pronounced E,P,S).
 EARNING AFTER TAX

Accountants call this net income or net profit

after taxes.

But finance people usually refer to it is a EAT

E Earning
A - After
T - Tax
 DECISION ABOUT RAISE ADDITIONAL
MONEY
When company wants to raise additional money
by issuing following three aspects
Equity Capital
Preference Stock
Debt or Debenture
which alternative will allow company to have the
highest earnings per share.
At that time company assume
assume a certain level of sales
calculate our estimated EBIT will be for each
alternative form of financing
 HOW TO TAKE DECISION
For example,
1. Current financed entirely with common stock,
the firm has 2000 shares of common stock
outstanding.
2. Currently pays no common stock dividend, all
earnings are retained and reinvested into the
company.
3. Needs to raise Rs 50000 in new money. As
financial manager.
4. 35% tax.
 .
To raise the Rs 50000 we considering the three
alternatives.
1. common stock- the company can sell
additional shares at the current price of Rs 50
per share. (50*1000=50000).
2. Preferred stock- dividend on preferred stock
is 7.3% of the raised money.
3. Debt- interest rate on debt is 4%.
EBIT 10000
 COMMON STOCK PREFFERENCE DEBT
STOCK
EBIT 10000 10000 10000
-INTEREST(4%) - - -2000
EBT 10000 10000 8000
- TAX (35%) -3500 -3500 -2800
EAT 6500 6500 5200
PREFERRED 0 -3650 -
DIVIDEND (7.3%)
EAT COMMON 6500 2850 5200
NO OF SHARE 3000 2000 2000
EPS 2.17 1.43 2.6
 DECISION

If the expected level of EBIT

1. 6000: indifference point

2. Less then 6000: Company would tend to use

common stock financing.
 .
3. Above 6000: Company would tend to use
debt financing.
 INDIFFERENCE POINT
The level of earnings before interest and tax (EBIT) at
which the earnings per share are the same irrespective
of the proportion of debt and equity.

If the firm attains this particular level of EBIT, the firm

need not bother about the debt-equity mix, since the
EPS will remain constant.

Every financial plan is equally desirable whether it

suggests 100% equity or 50-50 sharing between the
two or, for that matter, any other proportion between
debt and equity.