Financial ManagementQuestion 5501 of 217
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4. What would be the indifference point between Plan-1 and Plan-11?

Options

A` 34,33,333
B` 34,40,000
C` 35,15,000
D` 35,22,222
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Correct Answer

✅ Option B — ` 34,40,000

All Options:

  • A` 34,33,333
  • B` 34,40,000 ✓
  • C` 35,15,000
  • D` 35,22,222

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Detailed Solution & Explanation

The indifference point is the EBIT level at which the Earnings Per Share (EPS) under both financing plans is equal:
EPSI=EPSII\text{EPS}_I = \text{EPS}_{II}
(EBIT−II)(1−t)−PDINI=(EBIT−III)(1−t)−PDIINII\frac{(\text{EBIT} - I_I)(1 - t) - \text{PD}_I}{N_I} = \frac{(\text{EBIT} - I_{II})(1 - t) - \text{PD}_{II}}{N_{II}}

**1. Input Values:**
* Plan-I Interest (II\displaystyle I_I) = Rs. 13,60,000\displaystyle \text{Rs. } 13,60,000, Preference Dividend (PDI\displaystyle \text{PD}_I) = 0\displaystyle 0, Equity Shares (NI\displaystyle N_I) = 11,20,000\displaystyle 11,20,000
* Plan-II Interest (III\displaystyle I_{II}) = Rs. 11,00,000\displaystyle \text{Rs. } 11,00,000, Preference Dividend (PDII\displaystyle \text{PD}_{II}) = Rs. 2,86,000\displaystyle \text{Rs. } 2,86,000, Equity Shares (NII\displaystyle N_{II}) = 10,40,000\displaystyle 10,40,000
* Tax rate (t\displaystyle t) = 0.30\displaystyle 0.30

**2. Setting up and simplifying the equation:**
(EBIT−13,60,000)(1−0.30)−011,20,000=(EBIT−11,00,000)(1−0.30)−2,86,00010,40,000\frac{(\text{EBIT} - 13,60,000)(1 - 0.30) - 0}{11,20,000} = \frac{(\text{EBIT} - 11,00,000)(1 - 0.30) - 2,86,000}{10,40,000}
0.70(EBIT−13,60,000)11,20,000=0.70(EBIT−11,00,000)−2,86,00010,40,000\frac{0.70(\text{EBIT} - 13,60,000)}{11,20,000} = \frac{0.70(\text{EBIT} - 11,00,000) - 2,86,000}{10,40,000}
Dividing denominators by 80,000\displaystyle 80,000 gives 14\displaystyle 14 and 13\displaystyle 13:
0.70(EBIT−13,60,000)14=0.70(EBIT−11,00,000)−2,86,00013\frac{0.70(\text{EBIT} - 13,60,000)}{14} = \frac{0.70(\text{EBIT} - 11,00,000) - 2,86,000}{13}
0.05(EBIT−13,60,000)=0.70⋅EBIT−7,70,000−2,86,000130.05(\text{EBIT} - 13,60,000) = \frac{0.70 \cdot \text{EBIT} - 7,70,000 - 2,86,000}{13}
0.05⋅EBIT−68,000=0.70⋅EBIT−10,56,000130.05 \cdot \text{EBIT} - 68,000 = \frac{0.70 \cdot \text{EBIT} - 10,56,000}{13}
Multiplying both sides by 13\displaystyle 13:
13×(0.05⋅EBIT−68,000)=0.70⋅EBIT−10,56,00013 \times (0.05 \cdot \text{EBIT} - 68,000) = 0.70 \cdot \text{EBIT} - 10,56,000
0.65⋅EBIT−8,84,000=0.70⋅EBIT−10,56,0000.65 \cdot \text{EBIT} - 8,84,000 = 0.70 \cdot \text{EBIT} - 10,56,000
0.70⋅EBIT−0.65⋅EBIT=10,56,000−8,84,0000.70 \cdot \text{EBIT} - 0.65 \cdot \text{EBIT} = 10,56,000 - 8,84,000
0.05⋅EBIT=1,72,0000.05 \cdot \text{EBIT} = 1,72,000
EBIT=1,72,0000.05=Rs. 34,40,000\text{EBIT} = \frac{1,72,000}{0.05} = \text{Rs. } 34,40,000

Therefore, the indifference point between Plan-I and Plan-II is `Rs. 34,40,000`.

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

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