Perfact Limited is considering a total investment of 27 lakhs. You are required to CALCULATE the level of earnings before interest and tax (EBIT) at…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2025
Perfact Limited is considering a total investment of 27 lakhs. You are required to CALCULATE the level of earnings before interest and tax (EBIT) at which the EPS indifference point between the following financing alternatives will occur: (i) Equity share capital of 18,00,000 and 14% debentures of 9,00,000. Or (ii) Equity share capital of 15,00,000, 16% preference share capital of 5,00,000 and 14% debentures of 7,00,000. Assume the corporate tax rate is at 25% and par value of equity share is 10in each case. Also CALCULATE the Financial Break-Even Point (FBEP) for both the plans.

Suggested Answer and Working Notes:

At Indifference Point, EPS of Plan (i) = EPS of Plan (ii) Plan (i) (EBIT - I1)(1 - T) / E1 = (EBIT - 1,26,000)(1 - 0.25) / 1,80,000 0.75 EBIT = 4,48,500 EBIT = Indifference point = 5,98,000 Plan (ii) (EBIT - I2)(1 - T) – PD / E2 = (EBIT – 98,000)(1 – 0.25) – 80,000 / 1,50,000 A) Financial BEP FBEP = Int + (Pref Div / 1-t) Plan (i) = 1,26,000 + 0 = 1,26,000 Plan (ii) = 98,000 + {80,000 / (1 - 0.25)} = 2,04,666

Topics: Part-A: Financial Management

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