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प्रश्न
‘Ratan Ltd.’ and ‘Lara Ltd.’ are two companies, each with a capital employed of 20,00,000. Ratan Ltd.’ had raised funds by issuing shares whereas Lara Ltd.’s’ capital has 60% equity (in shares of 100 each) and 40% debt (comprising of 8% debentures). Both the companies have a Return on Investment of 10% and the tax rate is 40%.
State with reason which company will be able to give a better return to the shareholders. Show your calculations clearly.
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उत्तर
To determine which company provides a better return, we must calculate the Earnings Per Share (EPS) for both companies. This demonstrates the concept of Trading on Equity, in which using debt can increase returns to shareholders if the ROI exceeds the interest rate.
Comparative Calculation of EPS
| Particulars | Ratan Ltd. (All Equity) | Lara Ltd. (Equity + Debt) |
| Capital Employed | 20,00,000 | 20,00,000 |
| Debt (8% Debentures) | Nil | 8,00,000 (40% of 20L) |
| Equity (Shares of 100 each) | 20,00,000 | 12,00,000 (60% of 20L) |
| EBIT (10% of Capital) | 2,00,000 | 2,00,000 |
| Less: Interest (@ 8% on Debt) | Nil | (64,000) |
| EBT (Earnings Before Tax) | 2,00,000 | 1,36,000 |
| Less: Tax (@ 40%) | (80,000) | (54,400) |
| EAT (Earnings After Tax) | 1,20,000 | 81,600 |
| No. of Equity Shares | 20,000 (20L/100) | 12,000 (12L/100) |
| EPS (EAT/No. of Shares) | ₹ 6.00 | ₹ 6.80 |
Conclusion and Reason
Lara Ltd. will be able to give a better return to its shareholders.
Reason:
Lara Ltd. is earning a Return on Investment (ROI) of 10%, which is higher than the Cost of Debt (8%). When ROI exceeds the interest rate, the company benefits from Financial Leverage (Trading on Equity). The fixed interest expense reduces the tax liability and allows the remaining profit to be spread over a smaller number of equity shares, thereby increasing the EPS.
