The following data are presented in respect of Excellent Automation Ltd.: (₹) Profit before interest and tax 78,00,000 Less: Interest on debentures…

(b) In this question, EBIT after proposed extension is not given. Therefore, we can assume that existing return on capital employed will be maintained. Working notes: Return on Capital Employed = EBIT / Capital Employed = 78,00,000 / 4,50,00,000 = 17.33% Capital Employed = Debt + Equity = 1,50,00,000 + (₹ 1,20,00,000 +1,80,00,000) = 4,50,00,000 Proposed EBIT = Proposed Capital Employed x Return on capital employed = (₹ 4,50,00,000 +60,00,000) x 17.33% = 88,38,300 Debt Equity Ratio = Debt / (Debt + Equity) Option1: Loan option Debt = 1,50,00,000 +60,00,000 = 2,10,00,000 Equity = 3,00,00,000 Debt Equity ratio = 2.1 cr. / (2.1 cr. + 3 cr.) = 41.18% Debt equity ratio has crossed the limit of 35%, hence, PE ratio in this case will be 8 times and additional borrowing will be at the rate of 14%. Option2: Equity option Debt = 1,50,00,000 Equity = 3,00,00,000 +60,00,000 = 3,60,00,000 Debt Equity Ratio = 1.5 cr. / (1.5 cr. + 3.6 cr.) = 29.41% Debt equity ratio has not crossed the limit of 35% hence PE ratio in this case will remain at 10 times. Number of equity shares to be issued in case of equity option @25 per share = 60,00,000 /25 = 2,40,000 Calculation of EPS and MPS under two financial options Particulars Financial Options Option I 14% additional loan of 60,00,000 (₹) Option II 12,00,000 equity shares @ 10 and 2,40,000 equity shares @ 25 (₹) Profit before interest and Tax (PBIT) 88,38,300 88,38,300 Less: Interest on old debentures @ 12% 18,00,000 18,00,000 Less: Interest on additional loan (new) @ 14% on 60,00,000 8,40,000 Nil Profit before tax 61,98,300 70,38,300 Less: Taxes @ 50% 30,99,150 35,19,150 Earnings for equity shareholders (EAT/Profit after tax) 30,99,150 35,19,150 Number of Equity Shares 12,00,000 14,40,000 Earnings per Share (EPS) 2.58 2.44 Price/ Earnings ratio 8 10 Market price per share (MPS) 20.64 24.40