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A company has… (Class 12 Business Studies SQP 2026-27, Q19)

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Business StudiesCBSE Class 12 · Sample paper, session 2026-27 · 1 mark · MCQ

CBSE Class 12 Business Studies sample paper 2026-27: question 19

From the official CBSE sample question paper for 2026-27, section A, question 19, for 1 mark. Try it first; the hints and our step-by-step solution are below.

Q19 · 1 mark · MCQFinancial Management

A company has an existing equity share capital of ₹20,00,000. It proposes to raise an additional ₹10,00,000 either by issuing equity shares or by issuing 10% debentures. If the Earnings Before Interest and Tax (EBIT) of the company is ₹4,50,000 and the corporate tax rate is 30%, which of the following financing options will result in a higher Earnings Per Share (EPS)?

  1. (A)Issue of equity shares
  2. (B)Issue of debentures
  3. (C)Both financing options will result in the same EPS
  4. (D)EPS cannot be determined with the given information

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2026-27.

Hints

Open one hint at a time and try again before the next.

Hint 1

Compare the return on investment with the rate of interest.

Hint 2

Compute PAT for both options and divide by the number of shares.

Hint 3

Interest is tax-deductible.

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. With equity: PAT = 4,50,000 × 70% = ₹3,15,000 on ₹30,00,000 of equity. With 10% debentures: interest ₹1,00,000, EBT ₹3,50,000, PAT = ₹2,45,000 on ₹20,00,000 of equity.

  2. Taking a face value of ₹10, EPS = ₹1.05 with equity and ₹1.225 with debentures. Return on investment (4,50,000 ÷ 30,00,000 = 15%) exceeds the 10% interest, so trading on equity makes debentures give the higher EPS. Option (B).

    1 mark

Answer: (B) Issue of debentures

Where the marks are

  • ROI 15% > interest 10%: trading on equity (1 mark)

Revise the chapter

Practise this chapterBoard-style questions from Financial Management, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2026-27: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.