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5. What would be the Earnings Per Share (EPS) in Plan-1 and Plan-II at the indifference point as calculated by you above?

Options

A` 1.30 and ` 1.30
B` 1.65 and ` 1.75 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT
C` 1.50 and ` 1.50
D` 1.80 and ` 1.90 Case Scenario - II VP Ltd. provides the following financial information: Current Ratio 1.5:1 Sales (80% Credit Sales) ` 150 Lakh Inventory Turnover Ratio 6 Times Average Collection Period 2 months Gross Profit Ratio 20% Quick Ratio 1:1 From the information given above, choose the correct answer to the following Q. No. 6 and 7:
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Correct Answer

✅ Option A — ` 1.30 and ` 1.30

All Options:

  • A` 1.30 and ` 1.30 ✓
  • B` 1.65 and ` 1.75 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT
  • C` 1.50 and ` 1.50
  • D` 1.80 and ` 1.90 Case Scenario - II VP Ltd. provides the following financial information: Current Ratio 1.5:1 Sales (80% Credit Sales) ` 150 Lakh Inventory Turnover Ratio 6 Times Average Collection Period 2 months Gross Profit Ratio 20% Quick Ratio 1:1 From the information given above, choose the correct answer to the following Q. No. 6 and 7:

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Detailed Solution & Explanation

At the indifference point, the Earnings Per Share (EPS) under both plans is identical. We can compute this EPS using either Plan-I or Plan-II with the indifference EBIT of Rs. 34,40,000\displaystyle \text{Rs. } 34,40,000.

**1. Verification using Plan-I:**
* EBIT=Rs. 34,40,000\displaystyle \text{EBIT} = \text{Rs. } 34,40,000
* Less: Interest = Rs. 13,60,000\displaystyle \text{Rs. } 13,60,000
* EBT=Rs. 34,40,000−Rs. 13,60,000=Rs. 20,80,000\displaystyle \text{EBT} = \text{Rs. } 34,40,000 - \text{Rs. } 13,60,000 = \text{Rs. } 20,80,000
* Less: Tax @ 30% = Rs. 20,80,000×30%=Rs. 6,24,000\displaystyle \text{Rs. } 20,80,000 \times 30\% = \text{Rs. } 6,24,000
* EAT=Rs. 20,80,000−Rs. 6,24,000=Rs. 14,56,000\displaystyle \text{EAT} = \text{Rs. } 20,80,000 - \text{Rs. } 6,24,000 = \text{Rs. } 14,56,000
* Total Equity Shares = 11,20,000\displaystyle 11,20,000
* EPSI=Rs. 14,56,00011,20,000=Rs. 1.30\displaystyle \text{EPS}_I = \frac{\text{Rs. } 14,56,000}{11,20,000} = \text{Rs. } 1.30

**2. Verification using Plan-II:**
* EBIT=Rs. 34,40,000\displaystyle \text{EBIT} = \text{Rs. } 34,40,000
* Less: Interest = Rs. 11,00,000\displaystyle \text{Rs. } 11,00,000
* EBT=Rs. 34,40,000−Rs. 11,00,000=Rs. 23,40,000\displaystyle \text{EBT} = \text{Rs. } 34,40,000 - \text{Rs. } 11,00,000 = \text{Rs. } 23,40,000
* Less: Tax @ 30% = Rs. 23,40,000×30%=Rs. 7,02,000\displaystyle \text{Rs. } 23,40,000 \times 30\% = \text{Rs. } 7,02,000
* EAT=Rs. 23,40,000−Rs. 7,02,000=Rs. 16,38,000\displaystyle \text{EAT} = \text{Rs. } 23,40,000 - \text{Rs. } 7,02,000 = \text{Rs. } 16,38,000
* Less: Preference Dividend = Rs. 2,86,000\displaystyle \text{Rs. } 2,86,000
* Earnings for Equity = Rs. 16,38,000−Rs. 2,86,000=Rs. 13,52,000\displaystyle \text{Rs. } 16,38,000 - \text{Rs. } 2,86,000 = \text{Rs. } 13,52,000
* Total Equity Shares = 10,40,000\displaystyle 10,40,000
* EPSII=Rs. 13,52,00010,40,000=Rs. 1.30\displaystyle \text{EPS}_{II} = \frac{\text{Rs. } 13,52,000}{10,40,000} = \text{Rs. } 1.30

Since the EPS for both Plan-I and Plan-II is exactly `Rs. 1.30`, this confirms our calculation.

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

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