Financial ManagementQuestion 5498 of 217
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1. What would be the Earnings Per Share (EPS) of the company in Plan-I and Plan-II?

Options

A` 4.37 and `4.26
B` 3.36 and ` 3.88
C` 3.90 and ` 4.10
D` 4.25 and ` 4.50
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Correct Answer

✅ Option C — ` 3.90 and ` 4.10

All Options:

  • A` 4.37 and `4.26
  • B` 3.36 and ` 3.88
  • C` 3.90 and ` 4.10 ✓
  • D` 4.25 and ` 4.50

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Detailed Solution & Explanation

To calculate the Earnings Per Share (EPS) of Coral Ltd. under Plan-I and Plan-II, we first determine the financing structure and its impact on interest and equity shares.

**1. Initial Financial Position:**
* Existing Equity Capital = 10,00,000\displaystyle 10,00,000 shares of Rs. 10\displaystyle \text{Rs. } 10 each = Rs. 1,00,00,000\displaystyle \text{Rs. } 1,00,00,000 (Rs. 100 Lakh).
* Existing Debentures = 30,000\displaystyle 30,000 debentures of Rs. 100\displaystyle \text{Rs. } 100 each = Rs. 30,00,000\displaystyle \text{Rs. } 30,00,000 (Rs. 30 Lakh).
* Existing Interest Expense = Rs. 30,00,000×15%=Rs. 4,50,000\displaystyle \text{Rs. } 30,00,000 \times 15\% = \text{Rs. } 4,50,000.

**2. Expansion Details:**
* Additional Capital Required = Rs. 1,00,00,000\displaystyle \text{Rs. } 1,00,00,000 (Rs. 100 Lakh).
* Expected EBIT after expansion = Rs. 76,00,000\displaystyle \text{Rs. } 76,00,000.
* Corporate Tax Rate = 30%\displaystyle 30\%.
* Issue Price of New Equity Shares = Rs. 10\displaystyle \text{Rs. } 10 (Face Value) + Rs. 15\displaystyle \text{Rs. } 15 (Premium) = Rs. 25\displaystyle \text{Rs. } 25 per share.

**3. Calculations for Plan-I:**
* **Equity (30% of Rs. 100 Lakh):** Rs. 30,00,000\displaystyle \text{Rs. } 30,00,000.
* Number of new shares issued = Rs. 30,00,000Rs. 25=1,20,000\displaystyle \frac{\text{Rs. } 30,00,000}{\text{Rs. } 25} = 1,20,000 shares.
* Total shares = 10,00,000 (existing)+1,20,000 (new)=11,20,000\displaystyle 10,00,000 \text{ (existing)} + 1,20,000 \text{ (new)} = 11,20,000 shares.
* **13% Debentures (70% of Rs. 100 Lakh):** Rs. 70,00,000\displaystyle \text{Rs. } 70,00,000.
* New Interest Expense = Rs. 70,00,000×13%=Rs. 9,10,000\displaystyle \text{Rs. } 70,00,000 \times 13\% = \text{Rs. } 9,10,000.
* Total Interest Expense = Rs. 4,50,000 (existing)+Rs. 9,10,000 (new)=Rs. 13,60,000\displaystyle \text{Rs. } 4,50,000 \text{ (existing)} + \text{Rs. } 9,10,000 \text{ (new)} = \text{Rs. } 13,60,000.
* **Preference Shares:** 0%\displaystyle 0\%.
* **EPS for Plan-I:**
* EBIT=Rs. 76,00,000\displaystyle \text{EBIT} = \text{Rs. } 76,00,000
* Less: Interest=Rs. 13,60,000\displaystyle \text{Less: Interest} = \text{Rs. } 13,60,000
* Earnings Before Tax (EBT)=Rs. 76,00,000−Rs. 13,60,000=Rs. 62,40,000\displaystyle \text{Earnings Before Tax (EBT)} = \text{Rs. } 76,00,000 - \text{Rs. } 13,60,000 = \text{Rs. } 62,40,000
* Less: Tax @ 30%=Rs. 18,72,000\displaystyle \text{Less: Tax @ 30\%} = \text{Rs. } 18,72,000
* Earnings After Tax (EAT)=Rs. 43,68,000\displaystyle \text{Earnings After Tax (EAT)} = \text{Rs. } 43,68,000
* Earnings available to equity shareholders=Rs. 43,68,000\displaystyle \text{Earnings available to equity shareholders} = \text{Rs. } 43,68,000
* EPSI=Rs. 43,68,00011,20,000 shares=Rs. 3.90\displaystyle \text{EPS}_I = \frac{\text{Rs. } 43,68,000}{11,20,000 \text{ shares}} = \text{Rs. } 3.90.

**4. Calculations for Plan-II:**
* **Equity (10% of Rs. 100 Lakh):** Rs. 10,00,000\displaystyle \text{Rs. } 10,00,000.
* Number of new shares issued = Rs. 10,00,000Rs. 25=40,000\displaystyle \frac{\text{Rs. } 10,00,000}{\text{Rs. } 25} = 40,000 shares.
* Total shares = 10,00,000 (existing)+40,000 (new)=10,40,000\displaystyle 10,00,000 \text{ (existing)} + 40,000 \text{ (new)} = 10,40,000 shares.
* **13% Debentures (50% of Rs. 100 Lakh):** Rs. 50,00,000\displaystyle \text{Rs. } 50,00,000.
* New Interest Expense = Rs. 50,00,000×13%=Rs. 6,50,000\displaystyle \text{Rs. } 50,00,000 \times 13\% = \text{Rs. } 6,50,000.
* Total Interest Expense = Rs. 4,50,000 (existing)+Rs. 6,50,000 (new)=Rs. 11,00,000\displaystyle \text{Rs. } 4,50,000 \text{ (existing)} + \text{Rs. } 6,50,000 \text{ (new)} = \text{Rs. } 11,00,000.
* **7.15% Preference Shares (40% of Rs. 100 Lakh):** Rs. 40,00,000\displaystyle \text{Rs. } 40,00,000.
* Preference Dividend = Rs. 40,00,000×7.15%=Rs. 2,86,000\displaystyle \text{Rs. } 40,00,000 \times 7.15\% = \text{Rs. } 2,86,000.
* **EPS for Plan-II:**
* EBIT=Rs. 76,00,000\displaystyle \text{EBIT} = \text{Rs. } 76,00,000
* Less: Interest=Rs. 11,00,000\displaystyle \text{Less: Interest} = \text{Rs. } 11,00,000
* Earnings Before Tax (EBT)=Rs. 76,00,000−Rs. 11,00,000=Rs. 65,00,000\displaystyle \text{Earnings Before Tax (EBT)} = \text{Rs. } 76,00,000 - \text{Rs. } 11,00,000 = \text{Rs. } 65,00,000
* Less: Tax @ 30%=Rs. 19,50,000\displaystyle \text{Less: Tax @ 30\%} = \text{Rs. } 19,50,000
* Earnings After Tax (EAT)=Rs. 65,00,000−Rs. 19,50,000=Rs. 45,50,000\displaystyle \text{Earnings After Tax (EAT)} = \text{Rs. } 65,00,000 - \text{Rs. } 19,50,000 = \text{Rs. } 45,50,000
* Less: Preference Dividend=Rs. 2,86,000\displaystyle \text{Less: Preference Dividend} = \text{Rs. } 2,86,000
* Earnings available to equity shareholders=Rs. 45,50,000−Rs. 2,86,000=Rs. 42,64,000\displaystyle \text{Earnings available to equity shareholders} = \text{Rs. } 45,50,000 - \text{Rs. } 2,86,000 = \text{Rs. } 42,64,000
* EPSII=Rs. 42,64,00010,40,000 shares=Rs. 4.10\displaystyle \text{EPS}_{II} = \frac{\text{Rs. } 42,64,000}{10,40,000 \text{ shares}} = \text{Rs. } 4.10.

Hence, **Option C** is the correct answer.

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