EBIT - EPS ANALYSIS

Alternate (a) Alternate (b)

PROJECT COST 6,000,000 6,000,000

DEBT 0 4,000,000
EQUITY Rs 10 6,000,000 2,000,000
DEBT -EQUITY RATIO 0 2
SHARES OUTSTANDING 600,000 200,000
INTEREST 18%
TAX 0.40 0.40
EPS = EBIT(1-.40) / # SHARES NO DEBT CASE
EPS = (EBIT- Interest)(1-.40) / # SHARES WITH DEBT

EPS no debt = EPS with debt

EBIT (1-.40)/6,00,000 = (EBIT -7,20,000)(1-.40) / 2,00,000

EBIT= 10,80,000
ALTERNATE (a) NO DEBT
SHARES 600,000
EQUITY 6,000,000
DEBT 0

RECESSION EXPECTED EXPANSION

EBIT 600,000 1,200,000 1,800,000
Interst 0 0 0
EBT 600,000 1,200,000 1,800,000
TAX 240,000 480,000 720,000
Net Income 360,000 720,000 1,080,000
EPS 0.6 1.2 1.8

ALTERNATE (b) with Debt

SHARES 200,000
EQUITY 2,000,000
DEBT 4,000,000
INTEREST 18%
RECESSION EXPECTED EXPANSION 4.00
EBIT 600,000 1,200,000 1,800,000
Interst 720,000 720,000 720,000 3.00
EBT -120,000 480,000 1,080,000 Pont of indifference
2.00 EBIT=10,80,000
Tax -48000 192000 432000
Net Income -72,000 288,000 648,000
EPS -0.36 1.44 3.24 1.00

0.00
EBIT Alternative(a) Alternative (b) 0 500000 1000000 1500000
0 0.00 -2.16
-1.00
600,000 0.60 -0.36
1,200,000 1.20 1.44 -2.00
1,800,000 1.8 3.24
-3.00
Pont of indifference
EBIT=10,80,000

EPS = 1.08

point of indiffernce Alternative(a)

Alternative (b)
1000000 1500000 2000000