CBSE Class 12 Business Studies 2016 Outside Delhi set 1

Kay Ltd., is a company manufacturing textiles. It has a share capital of ₹60 lakhs. In the previous year its earning per share was ₹0.50. For diversification, the company requires additional capital of ₹40 lakhs. The company raised funds by issuing 10% Debentures for the same. During the year the company earned profit of ₹ 8 lakhs on capital employed. It paid tax @40%.

Question : 31

Total: 34

State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly.

Solution:

Profit before Interest and Tax =₹8,00,000 , Interest on 10% Debentures
=₹4,00,000(40,00,000×10∕100)
Profit before Tax = Profit before Interest and Tax - Interest
‌=8,00,000−4,00,000
‌=₹4,00,000
Tax @ 40%=₹1,60,000(4,00,000×40∕100)
Profit after Tax = Profit before Tax - Tax
‌=4,00,000−1,60,000
‌=₹2,40,000
EPS = Profit after Tax/ No. of Equity Shares
=2,40,000∕6,00,000
=₹0.4
(The face value of equity share is assumed to be ₹10 each. Hence, no. of equity shares is 6,00,000 )
This clearly shows that the shareholders have lost after the issue of debentures since the EPS has decreased from ₹0.50 to ₹0.40.

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