Question

Austec Ltd manufactures garden tools and has decided to expand operations. The new
operations are expected to increase EBIT from the current level of $500 000 to $1 million p.a.
Austec has a capital structure that utilises bonds, ordinary equity and preference shares. The
$500 000 of issued bonds pay 6% p.a.. Preference shares pay an annual fixed dividend of $70
000. The company has 1 000 000 ordinary shares that are trading at $5.1 per share. The
Australian corporate tax rate is 30%. Most of the shareholders of Austec live outside Australia
and cannot fully utilise dividend imputation credits.
Austec needs to raise $700 000 to fund the expansion. Assuming the company can issue new
shares at the current market price, what is the impact on EPS new shares are issued to fund the
centre? If new debt can be raised at a 9% interest rate, what is the impact on EPS of using debt
rather than a new equity issue?

Answer 1

Statement showing Change in EPS if new shares has been issued at current market price
Particular	Existing	Proposed
EBIT	5,00,000	10,00,000
Less:- Interest	30,000	30,000
EBT	4,70,000	9,70,000
Less:- Tax @ 30%	1,41,000	2,91,000
EAT	3,29,000	6,79,000
Less:- Preference Dividend	70,000	70,000
Earnings available for Equity Shareholder	2,59,000	6,09,000
Equity shares	10,00,000
Present EPS	0.2590
New Shares issued ($ 700,000 / $ 5.1 )		1,37,255
Total equity Shares post issuance		11,37,255
Revised EPS		0.5355

Statement showing Change in EPS if debt has been raised of $ 700,000 at 9% interest rate
Particular	Existing	Proposed
EBIT	5,00,000	10,00,000
Less:- Interest	30,000	93,000
EBT	4,70,000	9,07,000
Less:- Tax @ 30%	1,41,000	2,72,100
EAT	3,29,000	6,34,900
Less:- Preference Dividend	70,000	70,000
Earning availbvle for Equity Shareholder	2,59,000	5,64,900
Equity shares	10,00,000	10,00,000
Existing and revised EPS	0.2590	0.5649