Question

.The Earnings before Interest and tax of a company is Rs 10 lakhs for the current financial year on an investment of Rs 50 lakhs. Company has raised funds by issuing 10% Debentures for Rs 20 lakhs, 8% Preference shares for Rs 10,00,000 and rest by issuing equity shares. If the tax rate is 30%. Calculate the total tax payable by the company​

Answer 1

Answer:

Company should prefer debt to raise fund as debt is gainful for equity shareholders till ROI > Rate of interest

In the above case ROI=

Totalincome

EBIT

×100=

50

7

×100=14%

Interest=10%

14> 10 si debt is more suitable

(b) The company is leverage effect or trading on equity

(c) Yes company's decision will change if EBIT becomes 3 lac, because with 3 lac ROI will become less than interest

ROI=

Totalincome

EBIT

×100=

50

3

×100=6%

Interest 1=%

6< 10

So, now company must prefer equity to raise capital