Construct an ebit-eps chart for the six alternatives

Reference no: EM131376164

The Apex Limited is a newly incorporated company and wants to plan an appropriate capital structure. It can issue 15 per cent debt and 11 per cent preference capital and has a 35 per cent tax rate. The firm's initial requirement for funds is Rs 400 lakh and equity shares can be sold for a net price of Rs 25 per share. The possible capital structures are:

Alternatives Equity Preference Debentures

1 100% - -

2 75% - 25%

3 75% 25% -

4 50% 20% 30%

5 50% - 50%

6 30% 20% 50%

(i) Construct an EBIT-EPS chart for the six alternatives over an EBIT range of Rs 10 lakh to Rs 80 lakh.

(ii) Determine the indifference points for first and fourth alternatives and for fourth and sixth alternatives.

(iii) Is the maximisation of EPS at a specific level of EBIT the only function of a firm's capital structure? If not, are the points determined in (ii) truly ‘indifference' points?

Reference no: EM131376164

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