Page 111 - DMGT409Basic Financial Management
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Basic Financial Management
Notes level of EBIT is less than the indifference point, it is advantageous with the use of equity capital
to maximise EPS.
Indifference point between two capital structures can be obtained by using the following
formula:
Where
X = EBIT I1I2 = Interest under alternatives 1 and 2
t = Tax rate PD = Preference dividend
Dt = Preference dividend tax
ES , ES = No. of equity share outstanding under alternative 1 and 2
1 2
Illustration 8: WDC Ltd., has a total capitalisation of ` 10 lakh consisting entirely of equity capital
(` 10 each share). It is planning to raise an additional funds of ` 5 lakh for implementing capital
budgeting project. There are two alternatives available to the company.
a) Entire equity share capital by issue of shares.
b) Entire amount by debt at 10 per cent interest.
The company is in the tax brackets of 50 per cent. Calculate indifference point.
Solution:
Indifference point formula
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