Test Index

CBSE Class 12 Business Studies 2016 Outside Delhi set 1

Show Para  Hide Para 
Kay Ltd., is a company manufacturing textiles. It has a share capital of ₹60\text{₹}60 lakhs. In the previous year its earning per share was ₹0.50\text{₹}0.50. For diversification, the company requires additional capital of ₹40\text{₹}40 lakhs. The company raised funds by issuing 10%10\% Debentures for the same. During the year the company earned profit of ₹ 8 lakhs on capital employed. It paid tax @40%.
© examsnet.com
Question : 31 of 34
Marks: +1, -0
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=\text{₹} 8,00,000 , Interest on 10%10 \% Debentures
=₹4,00,000(40,00,000×10100)= \text{₹} 4,00,000\left(40,00,000 \times \frac{10}{100}\right)
Profit before Tax == Profit before Interest and Tax - Interest
  =8,00,000−4,00,000\;=8,00,000-4,00,000
  =₹4,00,000\;=\text{₹} 4,00,000
Tax @ 40%=₹1,60,000(4,00,000×40100)40\%=\text{₹} 1,60,000\left(4,00,000 \times \frac{40}{100}\right)
Profit after Tax == Profit before Tax - Tax
  =4,00,000−1,60,000\;=4,00,000-1,60,000
  =₹2,40,000\;= \text{₹} 2,40,000
EPS == Profit after Tax/ No. of Equity Shares
=2,40,0006,00,000= \frac{2,40,000}{6,00,000}
=₹0.4= \text{₹} 0.4
(The face value of equity share is assumed to be ₹10\text{₹} 10 each. Hence, no. of equity shares is 6,00,0006,00,000 )
This clearly shows that the shareholders have lost after the issue of debentures since the EPS has decreased from ₹0.50\text{₹} 0.50 to ₹0.40\text{₹} 0.40.
© examsnet.com
Go to Question:
Prev Question
Next Question