{"id":54627,"date":"2024-04-16T00:13:24","date_gmt":"2024-04-16T00:13:24","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=54627"},"modified":"2024-04-16T00:13:24","modified_gmt":"2024-04-16T00:13:24","slug":"on-the-basis-of-the-following-information-what-will-be-the-ebit-corresponding-to-financial-indifference-point-total-capital-outlay-rs-6000000-financing-plans-1-100-equity-rs-10-per-share-2","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/on-the-basis-of-the-following-information-what-will-be-the-ebit-corresponding-to-financial-indifference-point-total-capital-outlay-rs-6000000-financing-plans-1-100-equity-rs-10-per-share-2\/","title":{"rendered":"On the basis of the following information, what will be the EBIT corresponding to financial indifference point? Total capital outlay Rs. 60,00,000 Financing Plans 1. 100% Equity @ Rs. 10\/- per share 2. Debt &#8211; equity ratio 2 : 1 Rate of interest 18% p.a., corporate tax rate 40%"},"content":{"rendered":"<p>[amp_mcq option1=&#8221;Rs. 10,00,000&#8243; option2=&#8221;Rs. 12,00,000&#8243; option3=&#8221;Rs. 10,80,000&#8243; option4=&#8221;Rs. 12,80,000&#8243; correct=&#8221;option3&#8243;]<!--more--><\/p>\n<p>The correct answer is C. Rs. 10,80,000.<\/p>\n<p>The financial indifference point is the point at which the after-tax cash flows from two different financing plans are equal. In this case, the two financing plans are 100% equity and debt-equity ratio of 2:1.<\/p>\n<p>The after-tax cash flow from 100% equity financing is calculated as follows:<\/p>\n<p>EBIT * (1 &#8211; tax rate) = EBIT * (1 &#8211; 0.4) = 0.6 * EBIT<\/p>\n<p>The after-tax cash flow from debt-equity ratio of 2:1 is calculated as follows:<\/p>\n<p>EBIT * (1 &#8211; tax rate) + (Interest * (1 &#8211; tax rate)) = EBIT * (1 &#8211; 0.4) + (0.18 * 0.6 * EBIT) = 0.54 * EBIT<\/p>\n<p>The financial indifference point is the point at which 0.6 * EBIT = 0.54 * EBIT, or EBIT = 10,80,000.<\/p>\n<p>Here is a brief explanation of each option:<\/p>\n<ul>\n<li>Option A: Rs. 10,00,000. This is the EBIT for 100% equity financing. However, this is not the financial indifference point, because the after-tax cash flow from debt-equity ratio of 2:1 is greater than 0.6 * EBIT.<\/li>\n<li>Option B: Rs. 12,00,000. This is the EBIT for debt-equity ratio of 2:1. However, this is not the financial indifference point, because the after-tax cash flow from 100% equity financing is greater than 0.54 * EBIT.<\/li>\n<li>Option C: Rs. 10,80,000. This is the financial indifference point.<\/li>\n<li>Option D: Rs. 12,80,000. This is the EBIT for debt-equity ratio of 3:1. However, this is not the financial indifference point, because the after-tax cash flow from 100% equity financing is greater than 0.54 * EBIT.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>[amp_mcq option1=&#8221;Rs. 10,00,000&#8243; option2=&#8221;Rs. 12,00,000&#8243; option3=&#8221;Rs. 10,80,000&#8243; option4=&#8221;Rs. 12,80,000&#8243; correct=&#8221;option3&#8243;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[85],"tags":[],"class_list":["post-54627","post","type-post","status-publish","format-standard","hentry","category-accounting","no-featured-image-padding"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>On the basis of the following information, what will be the EBIT corresponding to financial indifference point? 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Total capital outlay Rs. 60,00,000 Financing Plans 1. 100% Equity @ Rs. 10\/- per share 2. Debt - equity ratio 2 : 1 Rate of interest 18% p.a., corporate tax rate 40%","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/exam.pscnotes.com\/mcq\/on-the-basis-of-the-following-information-what-will-be-the-ebit-corresponding-to-financial-indifference-point-total-capital-outlay-rs-6000000-financing-plans-1-100-equity-rs-10-per-share-2\/","og_locale":"en_US","og_type":"article","og_title":"On the basis of the following information, what will be the EBIT corresponding to financial indifference point? Total capital outlay Rs. 60,00,000 Financing Plans 1. 100% Equity @ Rs. 10\/- per share 2. 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