1. A company is in need of Rs.50 lakhs for expansion. It is considering two financing...

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1. A company is in need of Rs.50 lakhs for expansion. It is considering two financing alternatives. The first one is to raise the entire amount by issue of 5,00,000 equity shares at Rs.10 per share. The second option is to issue 3,00,000 equity shares at Rs.10 each and raise the remaining Rs.20 lakhs through long term debt, paying 12% interest per annum. The tax rate applicable to the company is 30%. The current capital structure of the company consists of 10,00,000 equity shares of Rs.10 each and 30,000 debentures of Rs.100 each carrying annual coupon of 12% If the EBIT after expansion is expected to be Rs.40 lakhs, which alternative will you recommend the firm? What is the break-even EBIT level? 1. A company is in need of Rs.50 lakhs for expansion. It is considering two financing alternatives. The first one is to raise the entire amount by issue of 5,00,000 equity shares at Rs.10 per share. The second option is to issue 3,00,000 equity shares at Rs.10 each and raise the remaining Rs.20 lakhs through long term debt, paying 12% interest per annum. The tax rate applicable to the company is 30%. The current capital structure of the company consists of 10,00,000 equity shares of Rs.10 each and 30,000 debentures of Rs.100 each carrying annual coupon of 12% If the EBIT after expansion is expected to be Rs.40 lakhs, which alternative will you recommend the firm? What is the break-even EBIT level?

Answer rating: 100% (QA)

To determine which financing alternative is more favorable for the company and calculate the breakeven EBIT level you need to compare the two options ... View the full answer