The Modern Arts Ltd requires 50,00,000 for a new project. This project is expected to yield earnings
Question:
The Modern Arts Ltd requires 50,00,000 for a new project. This project is expected to
yield earnings before interest and taxes of 7,50,000. While deciding about the financial plan,
the company considers the objective of maximizing earnings per share. It has three alternatives
to finance the project raising debt of 2,50,000 or 10,00,000 or 15,00,000 and the
balance, in each case, by issuing equity shares. The funds can be borrowed at the rate of 12 per
cent upto 2,50,000, at 15 per cent over 2,50,000 and upto 10,00,000 and at 20 per cent
over 10,00,000. The tax rate applicable to the company is 30 per cent. Which form of
financing should the company choose? The face value of each share is 100
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen