CBSE Class 12 Business Studies 2019 Outside Delhi set 1

'Smart Stationery Ltd.', wants to raise funds of ₹ 40,00,000 for its new project. The management is considering the following mix of debt and equity to raise this amount:

CapitalStructure	Alternative
CapitalStructure	I(₹)	II(₹)	III(₹)
Equity	40,00,000	30,00,000	10,00,000
Debt	0	10,00,000	30,00,000

Other details are as follows:

Interest‌Rate‌on‌Debt	9%
Face‌value‌of‌Equity‌Shares	₹100‌each
Tax‌Rate	30%
Earning‌before‌Interest‌and‌Tax(EBIT)	₹8,00,000

Question : 29

Total: 44

Under which of the three alternatives will the company be able to take advantage of Trading on Equity?

Solution:

CapitalStructure	Alternative I(₹)	Alternative II(₹)	Alternative III(₹)
Equity	40,00,000	30,00,000	10,00,000
Debt	0	10,00,000	30,00,000
TotalCapital	40,00,000	40,00,000	40,00,000
EBIT	80,00,000	80,00,000	80,00,000
LessInterest	-	(90,000)	(2,70,000)
EBT	80,00,000	7,10,000	5,30,000
Less Tax @ 30%	(2,40,000)	(2,13,000)	(1,59,000)
EAT	5,60,000	4,97,000	3,71,000
No. of shares of ₹ 100 each	40,000	30,000	10,000
EPS	14	16.57	37.1

With respect to EPS, alternative III will allow the company to take advantage of Trading on Equity.

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