(a) Sunder Ltd. is planning an expansion programme which will require ₹30 crores and can be funded through one of the three…

(a)(i) EPS under the three financing options

Assume existing paid-up capital is all equity shares of ₹100 each. Existing shares = ₹60 crore ÷ ₹100 = 60,00,000 shares. Post-expansion EBIT = ₹15 crore; tax rate = 30%; new finance = ₹30 crore.

• Option 1: Issue equity shares at par New shares = ₹30 crore ÷ ₹100 = 30,00,000 shares. Total shares = 60,00,000 + 30,00,000 = 90,00,000 shares. PBT = EBIT = ₹15 crore. Tax = 0.30 × ₹15 crore = ₹4.5 crore. PAT = ₹15 crore − ₹4.5 crore = ₹10.5 crore. EPS = ₹10.5 crore ÷ 90,00,000 = ₹35/3 = ₹11.67.

• Option 2: Raise 15% loan Debt = ₹30 crore. Interest = 0.15 × ₹30 crore = ₹4.5 crore. Shares remain 60,00,000. PBT = ₹15 crore − ₹4.5 crore = ₹10.5 crore. Tax = 0.30 × ₹10.5 crore = ₹3.15 crore. PAT = ₹10.5 crore − ₹3.15 crore = ₹7.35 crore. EPS = ₹7.35 crore ÷ 60,00,000 = ₹49/4 = ₹12.25.

• Option 3: Issue 12% preference shares Preference dividend = 0.12 × ₹30 crore = ₹3.6 crore. PBT = EBIT = ₹15 crore. Tax = 0.30 × ₹15 crore = ₹4.5 crore. PAT = ₹15 crore − ₹4.5 crore = ₹10.5 crore. Equity earnings = PAT − preference dividend = ₹10.5 crore − ₹3.6 crore = ₹6.9 crore. Shares remain 60,00,000. EPS = ₹6.9 crore ÷ 60,00,000 = ₹23/2 = ₹11.50.

Highest return to equity shareholders: Option 2, the 15% loan, gives the highest EPS of ₹12.25. Interest is tax-deductible, and the post-expansion EBIT exceeds the indifference level, so financial leverage benefits equity holders.

(a)(ii) Indifference point between equity financing and debt financing

Let EBIT = X ₹ crore. Under Option 1, shares = 0.9 crore shares. EPS1 = 0.70X ÷ 0.9. Under Option 2, shares = 0.6 crore shares and interest = ₹4.5 crore. EPS2 = 0.70(X − 4.5) ÷ 0.6.

At indifference, EPS1 = EPS2: 0.70X ÷ 0.9 = 0.70(X − 4.5) ÷ 0.6 X ÷ 0.9 = (X − 4.5) ÷ 0.6 0.6X = 0.9X − 4.05 0.3X = 4.05 X = 13.5 crore.

Indifference EBIT = ₹13.5 crore = ₹27/2 crore. At this EBIT, EPS under both options = 0.70 × ₹13.5 crore ÷ 0.9 crore shares = ₹10.50. Condition: If EBIT > ₹13.5 crore, debt financing gives higher EPS; if EBIT < ₹13.5 crore, equity financing gives higher EPS.

(b) Beta in CAPM

Beta (β) is the measure of a security’s systematic risk under the Capital Asset Pricing Model. It is defined as: βi = Cov(Ri, Rm) ÷ Var(Rm) = ρim × σi ÷ σm. CAPM uses it as: E(Ri) = Rf + βi[E(Rm) − Rf].

Systematic risk is market-wide risk—such as inflation, interest rates, recession or political shocks—that cannot be removed by diversification. Beta measures how sensitive an asset’s return is to market return movements. If the market return changes by 1%, the asset’s expected return changes by β%.

• β = 1: same volatility as the market.
• β > 1: aggressive or cyclical asset; amplifies market movements.
• 0 < β < 1: defensive asset; less volatile than the market.
• β = 0: uncorrelated with the market, like a risk-free asset.
• β < 0: moves inversely to the market.

For asset pricing, higher beta means higher systematic risk, so investors demand a higher risk premium and required return. This raises the cost of equity, lowers the present value of future cash flows, and affects capital budgeting and portfolio selection. Low-beta assets are priced with lower required returns and are preferred by risk-averse investors.

(c) Segmentation criteria for LMV and demographic variables

For a light motor vehicle company, effective segmentation requires the segment to be measurable, substantial, accessible, differentiable, actionable, stable, homogeneous within, heterogeneous across segments, profitable, and compatible with company resources. For LMV buyers, segments must also match distribution reach, service network, regulatory norms, and financing availability.

Demographic segmentation divides the market by measurable population characteristics:

• Age: Young first-job buyers may prefer compact hatchbacks such as Maruti Alto or Swift. Middle-aged family buyers may prefer sedans or SUVs such as Honda City or Hyundai Creta. Older buyers may value comfort and safety.

• Income: Lower-income buyers choose entry-level vehicles like Alto. Middle-income buyers choose Baleno or i20. High-income buyers choose premium LMVs such as Creta, Innova or higher variants.

• Family size and life-cycle stage: Bachelors may choose compact cars. Nuclear families may choose hatchbacks or compact sedans. Joint families may need seven-seaters like Ertiga or Innova.

• Occupation: Salaried urban commuters may prefer automatic compact cars. Businesspersons or farmers may prefer light commercial vehicles such as Tata Ace or pickup models for load and durability.

• Education: More educated buyers often demand safety features, connected technology, fuel efficiency and lower emissions.

• Gender: Women buyers may prefer compact, automatic, easy-to-park vehicles with safety features. Men may, in some segments, prefer larger SUVs, though such stereotypes are weakening.

• Social class: Upper-class buyers may prefer premium brands and top variants; middle-class buyers focus on value, mileage and resale.

• Generation: Gen Z buyers emphasise digital connectivity and styling; older generations emphasise reliability and comfort.

Thus, demographic variables help the LMV marketing manager design product variants, pricing, promotion and distribution for distinct consumer groups.