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Sir in the question that calculate effect on EPS and interest cover of the proposal to raise finance by issuing new debt (option 2) and comment on findings.
Sir the only thing which I am unable to understand in this part of question is that , as the question says that funds invested would earn before tax return of 18% per year , why examiner has added (3200*18% = 576) in operating profit of 3450, why has he not added it in PBT of 3250?
Also what would we comment in the end?
We need the effect on earnings per share, which is the profit after tax and interest.
The examiner has not added 576 to the operating profit. He has added the after tax increase of 576 x 80% to the current after-tax earnings of 2,600,000.
As far as the comment is concerned, read what the examiner has commented.
Sorry Sir I mean to say under option 3 he has added 3200*18% = 576 in operating profit of 3450. I want to ask why he has added in 3450, why not in in PBT of 3250?
Because the question wants the interest cover which is the profit before interest divided by the interest.
Sir of question says that funds invested would earn before tax return of 18% , so does it means that the return will always be added to PBIT instead of PBT? If yes then can you please explain me the reason behind it?
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