Question

A company is doing EBIT-EPS analysis as it is planning to use debt in its capital structure.
Arrange the following items in correct sequence for calculation of EPS
(A) Earnings Before Tax
(B) Earnings Before Interest and Taxes
(C) Earnings After Taxes
(D) Interest on Debt
Choose the correct answer from the options given below:

• A. (A), (B), (C), (D)
• B. (D), (C), (B), (A)
• C. (B), (C), (D), (A)
• D. (B), (D), (A), (C)

Hint:

Remember the standard income statement flow:
$\text{EBIT} \xrightarrow{-\text{Interest}} \text{EBT} \xrightarrow{-\text{Tax}} \text{EAT} \xrightarrow{\div \text{Shares}} \text{EPS}$.

Answer 1

The Correct Option is D

Concept:
EBIT-EPS analysis evaluates the impact of financial leverage on Earnings Per Share (EPS) across different levels of operating profit and debt financing.
Calculating EPS requires following the standard financial income statement sequence.

Step 1: Formula and Income Statement Flow:
The standard sequence for computing Earnings Per Share (EPS) is: \[ \text{Earnings Before Interest and Taxes (EBIT)} \] \[ \xrightarrow{-\;\text{Interest on Debt}} \] \[ \text{Earnings Before Tax (EBT)} \] \[ \xrightarrow{-\;\text{Tax}} \] \[ \text{Earnings After Tax (EAT)} \] \[ \text{EPS} = \frac{\text{Earnings After Tax (EAT)} - \text{Preference Dividend}}{\text{Number of Equity Shares}} \]

Step 2: Mapping the Given Components:
1. Earnings Before Interest and Taxes (EBIT): The initial operating profit, designated as (B).
2. Interest on Debt: Deducted from EBIT to cover debt obligations, designated as (D).
3. Earnings Before Tax (EBT): The resulting taxable income, designated as (A).
4. Earnings After Taxes (EAT): The net income remaining after tax deduction, designated as (C).

Step 3: Verification of Sequence:
Arranging these steps in the correct accounting order gives: (B) $\rightarrow$ (D) $\rightarrow$ (A) $\rightarrow$ (C).

Step 4: Final Answer:
Thus, the correct sequence corresponds to option (D).